<SEC-DOCUMENT>0000950134-01-504443.txt : 20011018
<SEC-HEADER>0000950134-01-504443.hdr.sgml : 20011018
ACCESSION NUMBER: 0000950134-01-504443
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 5
CONFORMED PERIOD OF REPORT: 20010430
FILED AS OF DATE: 20010730
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: H&R BLOCK INC
CENTRAL INDEX KEY: 0000012659
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PERSONAL SERVICES [7200]
IRS NUMBER: 440607856
STATE OF INCORPORATION: MO
FISCAL YEAR END: 0430
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-06089
FILM NUMBER: 1692429
BUSINESS ADDRESS:
STREET 1: 4400 MAIN ST
CITY: KANSAS CITY
STATE: MO
ZIP: 64111
BUSINESS PHONE: 8167536900
MAIL ADDRESS:
STREET 1: 4410 MAIN STREET
CITY: KANSAS CITY
STATE: MO
ZIP: 64111
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>c63912e10-k405.txt
<DESCRIPTION>FORM 10-K FOR THE FISCAL YEAR END APRIL 30, 2001
<TEXT>
<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: APRIL 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------- -------------------
COMMISSION FILE NUMBER: 1-6089
H&R BLOCK, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 44-0607856
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
4400 MAIN STREET, KANSAS CITY, MISSOURI 64111
(Address of principal executive offices, including zip code)
(816) 753-6900
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, without par value New York Stock Exchange
Pacific Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, WITHOUT PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the price at which the stock was sold on
June 1, 2001, was $5,519,309,259.
Number of shares of registrant's Common Stock, without par value, outstanding on
June 1, 2001: 92,064,143.
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
Certain specified portions of the registrant's annual report to
security holders for the fiscal year ended April 30, 2001, are incorporated
herein by reference in response to Part I, Item 1, and Part II, Items 5 through
Item 8, and certain specified portions of the registrant's definitive proxy
statement filed within 120 days after April 30, 2001, are incorporated herein by
reference in response to Part III, Items 10 through 13, inclusive.
PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
H&R Block, Inc. (the "Company") is a diversified company with
subsidiaries providing a wide range of financial products and services. In
fiscal year 2001, the Company's tax subsidiaries and their franchisees served
19.2 million taxpayers - more than any tax or accounting firm - through its more
than 10,400 offices located in the United States, Canada, Australia and the
United Kingdom. Another 2.3 million clients utilized the award-winning software
program, Kiplinger TaxCut(R) from H&R Block, and the online tax preparation
service. Investment services and securities products are offered through H&R
Block Financial Advisors, Inc. ("HRBFA"), member NYSE, SIPC. The Company is not
a registered broker-dealer. H&R Block Mortgage Corporation ("H&R Block
Mortgage") and Option One Mortgage Corporation ("Option One") offer a full range
of home mortgage products. RSM McGladrey, Inc. ("RSM") is a national accounting,
tax and consulting firm with more than 100 offices nationwide, as well as an
affiliation with 550 offices in 75 countries as the U.S. member of RSM
International.
The Company is a corporation that was organized in 1955 under the laws
of the State of Missouri. It is the parent corporation in a two-tier holding
company structure following a 1993 corporate restructuring. The second-tier
holding company is H&R Block Group, Inc., a Delaware corporation and the direct
or indirect owner of the operating subsidiaries that provide tax and financial
services to the general public principally in the United States, but also in
Canada, Australia and the United Kingdom. Approximately 58% of the total
revenues of the Company in fiscal year 2001 were generated by subsidiaries
involved in tax return preparation, electronic filing of income tax returns and
other tax-related services. The Company's subsidiaries also offer investment
services through broker-dealers, originate, service and sell mortgages, offer
personal productivity software, participate in refund anticipation loan products
offered by a third-party lending institution, and offer accounting, tax and
consulting services to business clients.
Developments during fiscal year 2001 within U.S. tax operations,
International tax operations, Mortgage operations, Investment services and
Business services are described in the section below entitled "Description of
Business."
Henry W. Bloch retired as Chairman of the Board of Directors of the
Company and as a director on September 13, 2000. Pursuant to a succession plan
for senior management approved by the Board of Directors on June 21, 2000, Frank
L. Salizzoni succeeded Henry
<PAGE> 3
Bloch as Chairman of the Board of Directors in September 2000 and retired as
Chief Executive Officer on December 31, 2000. Mr. Salizzoni continues in the
role of Chairman of the Board of Directors. Pursuant to the succession plan,
Mark A. Ernst, formerly President and Chief Operating Officer, assumed the role
of President and Chief Executive Officer of the Company as of January 1, 2001.
During the fiscal year ended April 30, 2001, the Company was not
involved in any bankruptcy, receivership or similar proceedings or any material
reclassifications, mergers or consolidations, and the Company did not acquire or
dispose of any material amount of assets during such year.
The information contained in this Form 10-K and the exhibits hereto may
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Such statements are based upon current information, expectations, estimates and
projections regarding the Company, the industries and markets in which the
Company operates, and management's assumptions and beliefs relating thereto.
Words such as "will," "plan," "expect," "remain," "intend," "estimate,"
"approximate," and variations thereof and similar expressions are intended to
identify such forward-looking statements. These statements speak only as of the
date on which they are made, are not guarantees of future performance, and
involve certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual outcomes and results could materially differ from
what is expressed, implied or forecast in such forward-looking statements. Such
differences could be caused by a number of factors including, but not limited
to, the uncertainty of laws, legislation, regulations, supervision and licensing
by Federal, state and local authorities and their impact on any proposed or
possible transactions and the lines of business in which the Company's
subsidiaries are involved; unforeseen compliance costs; changes in economic,
political or regulatory environments; changes in competition and the effects of
such changes; the inability of the Company's subsidiaries to successfully expand
the financial planning and investment services business, the national accounting
and consulting practice, the retail mortgage business, and the core tax
business; the inability to implement the Company's strategies with respect to
such expansion and other strategies; changes in management and management
strategies; the Company's inability to successfully design, create, modify and
operate its computer systems and networks; litigation involving the Company; the
inability of the Company to purchase shares of its Common Stock pursuant to its
share repurchase program; the Company's inability to successfully integrate the
operations of acquired firms and risks described from time to time in reports
and registration statements filed by the Company and its subsidiaries with the
Securities and Exchange Commission ("SEC"). Readers should take these factors
and risks into account in evaluating any such forward-looking statements. The
Company undertakes no obligation to update publicly or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
2
<PAGE> 4
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The information required by Item 101(b) of Regulation S-K relating to
financial information about industry segments is contained in the Notes to
Consolidated Financial Statements in the Company's annual report to security
holders for the fiscal year ended April 30, 2001, and is hereby incorporated by
reference.
NUMBER OF EMPLOYEES
The Company itself has no employees. Its direct and indirect wholly
owned subsidiaries have approximately 9,600 regular full-time employees. The
highest number of persons employed by the subsidiaries during the fiscal year
ended April 30, 2001, including seasonal employees, was approximately 99,400.
DESCRIPTION OF BUSINESS
U.S. TAX OPERATIONS
Generally. This operating segment provides to the general public in the
United States income tax return preparation services, electronic filing services
and other services related to income tax return preparation, participates in
refund anticipation loan products offered by a third-party lending institution,
offers a wide range of online tax services including online tax preparation and
electronic filing through the web site at www.hrblock.com, and sells to the
general public tax return preparation software and other personal productivity
computer software.
Tax Services. The income tax return preparation and related services
business is the original core business of the Company. These services are
provided to the public in the United States through a system of offices operated
by tax subsidiaries of H&R Block Services, Inc. (collectively referred to as
"Tax Services") or by others to whom Tax Services has granted franchises. Tax
Services and its franchisees (collectively referred to herein as "H&R Block")
provide to the general public H&R Block income tax return preparation services,
electronic filing services, the Peace of Mind program (described below) and
other services relating to income tax return preparation. For U.S. returns, H&R
Block offers a refund anticipation loan service, the Refund Rewards program
(described below) and an electronic refund advance loan service in conjunction
with its electronic filing service. H&R Block also markets its knowledge of how
to prepare income tax returns through its income tax training schools.
Taxpayers Served. H&R Block served approximately 16,883,000 taxpayers
in the United States during fiscal year 2001, compared to 16,933,000 taxpayers
served in fiscal year 2000 and 16,542,000 taxpayers served in fiscal 1999.
"Taxpayers served" includes taxpayers for whom H&R Block prepared income tax
returns (both online and in H&R Block offices) as well as taxpayers for whom H&R
Block provided only electronic filing services.
Tax Return Preparation. During the 2001 income tax filing season
(January 1 through April 30), H&R Block offices in the United States prepared
approximately
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<PAGE> 5
16,442,000 individual income tax returns, compared to the preparation of
16,276,000 returns in fiscal year 2000, and 15,761,000 returns in fiscal year
1999. These returns constituted 13.9% of an IRS estimate of total individual
income tax returns filed as of April 30, 2001, compared to 14% in fiscal 2000.
The following table shows the approximate number of income tax returns prepared
at H&R Block offices during the last five tax filing seasons:
Tax Season Ended April 30
(in thousands)
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Returns Prepared 14,302 14,838 15,761 16,276 16,442
</TABLE>
During the tax season, most H&R Block offices are open from 9:00 a.m.
to 9:00 p.m. weekdays and from 9:00 a.m. to 5:00 p.m. Saturdays and Sundays.
Office hours are often extended during peak periods. Most tax preparation
business is transacted on a cash basis. The procedures of Tax Services have been
developed so that a tax return is prepared on a computer in the presence of the
client, in most instances in less than one hour, based on information furnished
by the client. Pursuant to the one-stop service offered at company-owned
offices, the return is reviewed for accuracy and presented to the client for
signature and filing during his or her initial visit to the office.
Electronic Filing. Electronic filing reduces the amount of time
required for a taxpayer to receive a Federal tax refund and provides assurance
to the client that the return, as filed with the Internal Revenue Service
("IRS"), is mathematically accurate. If the client desires, he or she may have
his or her refund deposited by the Treasury Department directly into his or her
account at a financial institution designated by the client.
An eligible electronic filing client may also apply for a refund
anticipation loan ("RAL") at an H&R Block office. Under the 2001 RAL program,
Tax Services' electronic filing clients who met certain eligibility criteria
were offered the opportunity to apply for loans from Household Bank
("Household") in amounts based upon the clients' anticipated Federal income tax
refunds. Income tax return information is simultaneously transmitted by H&R
Block to the IRS and the lending bank. Within a few days after the date of
filing, a check in the amount of the loan, less the bank's transaction fee and
H&R Block's tax return preparation fee, is received by the RAL client. The IRS
then directly deposits the participating client's actual Federal income tax
refund into a designated account at the bank in order for the loan to be repaid.
Tax Services received a $9.00 fee per RAL from Household for sublicense of
patent rights, the license of trademarks and certain expenses incurred in
connection with the making of RALs.
In fiscal year 2001, H&R Block was again named a partner in the IRS's
"Debt Indicator" pilot program. The Debt Indicator program is designed to
increase the number of electronically filed returns and aid the IRS, H&R Block
and other IRS partners in screening for electronic filing fraud. Under the
program, the IRS advises its partners if a
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requested refund will be reduced by an offset, such as back taxes, delinquent
student loans or overpayment from federal agencies. Household uses the Debt
Indicator in determining whether to make a refund anticipation loan. In exchange
for access to the Debt Indicator, tax preparers agree to help in strengthening
anti-fraud efforts and increasing the number of electronically filed returns.
H&R Block also offers an electronic refund service pursuant to which an
eligible electronic filing service client's income tax refund is directly
deposited into an account at a bank (Tax Services used Household in 2001) within
approximately three weeks after the tax return is electronically filed. A check
is thereafter issued to the taxpayer in the amount of the refund, less the
bank's transaction fee and H&R Block's tax return preparation fee.
H&R Block filed approximately 13,327,000 U.S. tax returns
electronically in fiscal 2001 compared to 12,592,000 in fiscal 2000 and
11,139,000 in fiscal 1999. Approximately 4,496,000 refund anticipation loans
were processed in fiscal 2001 by H&R Block, compared to 4,814,000 in fiscal 2000
and 2,811,000 in fiscal 1999. Approximately 1,935,000 electronic refunds were
processed in fiscal 2001 by H&R Block, compared to 1,499,000 in fiscal 2000 and
1,916,000 in fiscal 1999.
In fiscal 2001, H&R Block offered a service to transmit state income
tax returns electronically to state tax authorities in 41 states and the
District of Columbia (compared to 39 states and the District of Columbia in
fiscal 2000 and 38 states and the District of Columbia in fiscal 1999) and plans
to continue to expand this program as more states make this filing alternative
available to their taxpayers.
New Logo. The Company's subsidiaries introduced their first logo
redesign in more than two decades in August 2000 to symbolize the transformation
of the Company's business from tax preparer to financial partner. The new logo
is a large bright green block accompanied by the H&R Block name to the right. It
began appearing on signage at H&R Block tax offices and in promotional materials
immediately after its introduction.
Refund Rewards Program. H&R Block expanded its Refund Rewards(TM)
program for 2001 by making it available to all tax clients and by making it
easier for clients to take advantage of the program. Under the expanded program,
all clients who had their tax returns prepared at a participating H&R Block
office were eligible to receive at the end of the tax preparation process a
coupon booklet containing offers from the program's participating merchants.
Express IRA. In fiscal 2001, H&R Block introduced the Express IRA to
tax clients in 14 states. With the Express IRA product, tax preparation clients
in those states can open an IRA with HRBFA by using all or part of their tax
refund, or by writing a personal check for the amount deposited into the IRA.
The Express IRA is invested in an FDIC-Insured money market account through
Reserve Management Corporation at an insured depository institution paying
competitive money market interest rates. Clients funded approximately 25,000
Express IRAs in fiscal year 2001.
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Employer Solutions. In fiscal year 2001, H&R Block launched H&R Block
Employer Solutions. Under this program, employers throughout the United States
are able to add H&R Block income tax return preparation to its employee benefits
packages and H&R Block was able to attract new, targeted clients.
Million Dollar Giveaway. The Company unveiled the H&R Block Million
Dollar Giveaway promotion in 2001. Anyone who used the Company's tax services
(either in an office, through the Kiplinger TaxCut(R) software, or online at the
Company's web site) or the Company's mortgage or financial services on or prior
to April 15, 2001 was automatically entered into a drawing to win one million
dollars. Tax Services also sponsored four episodes of ABC's "Who Wants to be a
Millionaire" game show during the week of February 18, 2001 and paid the taxes
on each contestant's winnings during that week.
H&R Block Guarantee and "Peace of Mind" Program. If an H&R Block
preparer makes an error in the preparation of a client's tax return that results
in the assessment of any interest or penalties on additional taxes due, while
H&R Block does not assume the liability for the additional taxes (except under
its "Peace of Mind" program described below), it guarantees payment of the
interest and penalties.
Under the "Peace of Mind" program, in addition to H&R Block's standard
guarantee to pay penalties and interest attributable to errors made by an H&R
Block preparer, H&R Block agrees to pay additional taxes owed by the client (for
which liability would not ordinarily accrue) resulting from such errors. The
Peace of Mind program has a per client cumulative limit of $4,000 ($5,000 at H&R
Block Premium offices) in additional taxes assessed with respect to the Federal,
state and local tax returns prepared by H&R Block for the taxable year covered
by the program. There is an additional charge for the "Peace of Mind" program,
except at H&R Block Premium offices.
Income Tax Courses. H&R Block offers income tax return preparation
courses to the public that teach taxpayers how to prepare their own income tax
returns, as well as to provide H&R Block with a source of trained income tax
return preparers. During the 2001 fiscal year, 165,600 students enrolled in H&R
Block's basic and advanced income tax courses in the United States, compared to
175,200 students during fiscal year 2000 and 159,216 students during fiscal year
1999.
Owned and Franchised Offices. Most H&R Block offices are similar in
appearance and usually contain the same type of furniture and equipment, in
accordance with the specifications of Tax Services. Freestanding offices are
generally located in business and shopping centers of large metropolitan areas
and in the central business areas of smaller communities. All offices are open
during the tax season. During the balance of the year, only a limited number of
offices are open, but through telephone listings, H&R Block personnel are
available to provide service to clients throughout the entire year.
In addition to its regular offices, H&R Block offers tax return
preparation services at H&R Block Premium offices in the United States.
Appealing to taxpayers with more complex returns, H&R Block Premium stresses the
convenience of appointments, year-round tax service from the same preparer and
private office interviews. The number of H&R Block Premium offices decreased in
fiscal year 2001 to 484, compared to 555 in fiscal
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year 2000 and 617 in fiscal year 1999. In fiscal 2001, the number of H&R Block
Premium clients decreased to approximately 559,000, compared to approximately
619,000 in fiscal 2000 and approximately 719,000 in fiscal year 1999.
In fiscal year 2001, H&R Block also operated 746 offices in department
stores in the United States, including offices in Sears stores operated as "H&R
Block at Sears." During the 2001 tax season, the Sears' facilities constituted
approximately 8.1% percent of the tax office locations of H&R Block. Tax
Services is a party to a license agreement with Sears relating to Tax Service's
operation in Sears' locations throughout the United States. Such license
agreement expires on December 31, 2004, subject to termination rights of both
parties for a limited period of time after each tax season. Tax Services
believes its relations with Sears to be excellent and that both parties to the
license arrangement view the operations thereunder to date as satisfactory.
On April 16, 2001, there were 9,072 H&R Block offices in operation in
the United States compared to 9,210 offices in operation on April 17, 2000 and
8,923 offices in operation on April 15, 1999. Of the 9,072 offices, 5,060 were
owned and operated by Tax Services (compared to 5,162 in fiscal year 2000 and
4,880 in fiscal year 1999) and 4,012 were owned and operated by independent
franchisees (compared to 4,048 in fiscal 2000 and 4,043 in fiscal 1999). Of such
franchised offices in fiscal 2001, 2,717 were operated by franchisees of Tax
Services (described below), 811 were operated by "major" franchisees (described
below) and 484 were operated by franchisees of major franchisees.
The Company and its subsidiaries have principally granted two types of
franchises- franchises (formerly called "satellite" franchises) and major
franchises. "Major" franchisees entered into agreements with the Company
(primarily in the Company's early years) covering larger cities and counties and
providing for the payment of franchise royalties based upon a percentage of
gross revenues of their offices. Under the agreements, the Company granted to
each franchisee the right to the use of the name "H&R Block" and provided a
Policy and Procedure Manual and other supervisory services. Tax Services offers
to sell furniture, signs, advertising materials, office equipment and supplies
to major franchisees. Each major franchisee selects and trains the employees for
its office or offices. Since March 1993, HRB Royalty, Inc., an indirect
subsidiary of the Company, has been the franchisor under the major franchise
agreements.
Franchises have been granted by Tax Services in smaller localities. A
franchisee receives from Tax Services signs, designated equipment, specialized
forms, local advertising, initial training, and supervisory services and,
consequently, pays Tax Services a higher percentage of his or her gross tax
return preparation and related service revenues as a franchise royalty than do
major franchisees. Many of the franchises of Tax Services are located in cities
with populations of 15,000 or less. Some major franchisees also grant franchises
to sub-franchisees in their respective areas.
It has always been the policy of Tax Services to grant tax return
preparation franchises to qualified persons without an initial franchise fee;
however, the policy of Tax Services is to require a deposit to secure compliance
with franchise contracts.
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From time to time, Tax Services has acquired the operations of existing
franchisees and other tax return preparation businesses, and it will continue to
do so if future conditions warrant such acquisitions and satisfactory terms can
be negotiated. In fiscal year 2001, Tax Services acquired 11 franchise offices
and six offices of other tax businesses.
E-Commerce Initiatives. The Company's subsidiaries offer a wide range
of online services, including online tax preparation, electronic filing of tax
returns, mortgage products and brokerage services, through their web site at
www.hrblock.com. The web site is organized into three main areas: Taxes,
Mortgages and Investments.
The Taxes area offers a comprehensive range of tax tools, from tax
advice to complete professional tax return preparation and electronic filing. In
fiscal 2001, three new online tax products and services were introduced:
Professional Review, Professional Tax Service and Ask a Tax Advisor. With
Professional Review, taxpayers who prepare their income tax returns using the
Online Tax Program can have their self-prepared return reviewed and signed by an
H&R Block preparer and covered by the standard H&R Block Guarantee. The $29.95
fee charged for this service in 2001 included the review of both the federal and
state resident tax return. Taxpayers choosing Professional Tax Service can
provide their tax information online, and have an H&R Block tax preparer prepare
and deliver a completed tax return to the client. The $99.95 fee charged for
this service in 2001 included the preparation and electronic filing of the
taxpayer's federal income tax return and the preparation of one state return.
The new Ask a Tax Advisor service allows a taxpayer to obtain customized answers
to individual tax questions from an H&R Block tax advisor. Ask a Tax Advisor is
available via e-mail, live chat, or telephone. A charge of $19.95 per question
was assessed to the taxpayer in fiscal year 2001.
In addition to these new services, the web site at www.hrblock.com
continues to provide users with the ability to prepare their income tax returns
online using the Online Tax Program, receive tax tips and tax-related news,
subscribe to a tax newsletter and use withholding and refund calculators for tax
planning. The Online Tax Program, designed for the do-it-yourself taxpayer,
enables such taxpayers with Internet access to input their income tax return
information securely online, and have the program perform all the calculations
and complete the appropriate IRS forms. The $19.95 fee charged for this service
in 2001 included the online preparation and electronic filing of the federal
return and the preparation of one resident state return.
In fiscal year 2001, Block Financial Corporation ("BFC"), an indirect
subsidiary of the Company, entered into an agreement with Yahoo! Inc. to provide
tax-related content and online tax services to Yahoo! consumers on the Yahoo!
Tax Center. In fiscal year 2000, BFC teamed with Microsoft Corporation
("Microsoft"), pursuant to a three-year agreement, to provide exclusive web-and
desktop-based tax preparation products for Microsoft consumers who use
MSN(TM) MoneyCentral(TM) personal finance service.
The Taxes area also offers a program called Electronic Refund Advance
("ERA"), a loan product that allows a user to have a refund anticipation loan in
an amount up to $5,000 deposited directly into his or her bank account usually
within two days after the IRS accepts the taxpayer's electronically filed
return. ERA is a loan and the lending institution, Household, charged a $29.95
fee for each transaction during the 2001 tax
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season. Household paid BFC a license fee for each approved ERA of $7.21 for the
sublicense of patent rights, the license of trademarks and certain expenses
incurred in connection with the making of ERAs.
The Mortgages area enables users to apply for mortgages online and
track the status of their applications through the web site. H&R Block Mortgage
has teamed with E-Loan, Inc. ("E-Loan"), a leading online lender, to provide a
competitive mortgage marketplace where users can shop with more than 70 loan
providers for low rates on mortgages. The Mortgages area also includes
interactive calculators to estimate the tax implications and benefits of home
ownership, e-mail notification when the desired loan rate becomes available, a
tool that recommends the best loan types for a borrower's situation, customized
rate quotes and a mortgage comparison feature.
The Investments area provides online investment services through HRBFA,
a registered securities broker-dealer. Users may open a variety of accounts,
obtain research, create financial plans, execute trades in a variety of
securities including stocks, fixed-income products (including bonds,
certificates of deposit, and unit investment trusts), and a variety of mutual
funds, as well as view the status of their account on-line. See "Integrated
Online Services" under "Investment Services," below.
BFC has arranged with Answer Financial, a leading Internet insurance
marketplace, to offer through the Company's web site free, multiple insurance
quotes for term-life, health, homeowners and automobile insurance products from
leading insurers.
Software Products. BFC develops and markets the income tax preparation
software Kiplinger TaxCut(R) from H&R Block and markets Home and Business
Attorney, Kiplinger's WILLPower(SM) and Names & Dates(R) software products.
Refund Anticipation Loan Participations. BFC is a party to a July 1996
agreement with Household to participate in RALs provided by Household to H&R
Block tax clients. See "Electronic Filing" under "Tax Services" above for a
discussion of RALs. In the 10-year agreement, BFC agreed to purchase an initial
40% participation interest in such RALs, which interest would be increased to
nearly 50% in specified circumstances. Beginning in fiscal 1999, the
participation interest was increased to 49.9% in company-owned RALs, and BFC
participated in 25% of major franchise RALs. BFC's purchases of the
participation interests are financed through short-term borrowings. BFC bears
all of the risks associated with its interests in the RALs. BFC's total RAL
revenue in fiscal year 2001 was approximately $133.7 million (compared to
revenue of $89.8 million in fiscal 2000 and $90.2 million in fiscal 1999),
generating approximately $68.0 million in pretax profits (compared to $45.8
million in pretax profits in fiscal year 2000 and $19.1 million in pretax
profits in fiscal year 1999).
Seasonality of Business. Since most of the clients of Tax Services file
their tax returns during the period from January through April of each year,
substantially all of Tax Services' revenues from income tax return preparation,
related services and franchise royalties are received during this period. As a
result, Tax Services operates at a loss through the first eight or nine months
of its fiscal year. Historically, such losses primarily reflect payroll of
year-round personnel, training of income tax preparers, rental and
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furnishing of tax offices, and other costs and expenses relating to preparation
for the following tax season. For the first time in the Company's history, U.S.
tax operations reported in fiscal year 2001 a profit for the third quarter. An
early start to the tax season, disciplined expense control and strong
improvements in e-commerce business all contributed to this third quarter 2001
profit.
BFC's income tax return preparation software, online tax service and
RAL participation businesses are also seasonal, with the substantial portion of
the revenues from these businesses generated during the tax season.
Service Marks and Trademarks. HRB Royalty, Inc., a Delaware
corporation, claims ownership of the following service marks and trademark
registered on the principal register of the United States Patent and Trademark
Office:
Alguien En Quien Confiar
Block Mortgage
Executive (when used in connection with the preparation of income
tax returns for others)
H&R Block in Two Distinct Designs
H&R Block Premium
Rapid Refund H&R Block and Design
Someone You Can Count On
The Income Tax People
In addition, HRB Royalty, Inc., claims ownership of the following
unregistered service marks and trademarks:
America's Largest Tax Service
BlockBonus
Double Check Challenge
H&R Block in a Third Distinct Design (4)
H&R Block Just Plain Smart and Design (4)
H&R Block Rapid Refund and Design
Just Plain Smart (4)
Nation's Largest Tax Service
Refund Rewards
Smart Solutions
We know. Do you?
Tax Services has a license to use the trade names, service marks and
trademarks of HRB Royalty, Inc., in the conduct of the business of Tax Services.
BFC claims ownership of the following services marks and trademarks
registered on the principal register of the United States Patent and Trademark
Office:
Audit Buster Financial Finder
B and Design (2) Names and Dates
Block Financial (2) Small Business Attorney
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Block Financial and B Design Tax Cut
Conductor Tax Cut and Design
Conductor and Baton Design Web
Conductor and Hand-Held Baton Design Webbank
Conductor Card Review Webcard
Fast Lane Webpay
BFC also claims ownership of the following unregistered service marks
and trademarks:
CONDUCTOR.COM
DittoCard
Download Depot
Home Legal Advisor
Netguard
Small Business Attorney
Solve Your Everyday Business Problems
The Fastest and Easiest Way To Do Your Taxes
WebAccount
WebBroker
WebChecking
Will Power
Willpower
Your Complete Personal Legal Resource
BFC also claims ownership of the patent "SYSTEM FOR ON-LINE FINANCIAL
SERVICES USING DISTRIBUTED OBJECTS" registered as Patent No. 5,706,442 on
January 6, 1998, on the principal register of the United States Patent and
Trademark Office.
In connection with BFC's sale of its credit card portfolio in January
1999, it granted to Providian National Bank non-exclusive, non-transferable and
royalty-free licenses to use the mark "Conductor and Baton Design" for up to two
years, the patent "SYSTEM FOR ON-LINE FINANCIAL SERVICES USING DISTRIBUTED
OBJECTS" for a period of ten years, and the mark "CONDUCTOR.COM" perpetually.
Competitive Conditions. The tax return preparation and electronic
filing businesses are highly competitive. There are a substantial number of tax
return preparation firms and accounting firms that offer tax return preparation
services. Many tax return preparation firms and many firms not otherwise in the
tax return preparation business are involved in providing electronic filing and
refund anticipation loan services to the public. Commercial tax return preparers
and electronic filers are highly competitive with regard to price, service and
reputation for quality. Tax Services believes that, in terms of the number of
offices and tax returns prepared, it is the largest tax return preparation firm
in the United States. Tax Services also believes that, in terms of the number of
offices and tax returns electronically filed in fiscal year 2001, it is the
largest provider of electronic filing services in the United States.
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The software and e-commerce businesses are highly competitive and
consist of a large number of companies. In the software industry, Intuit, Inc.
and Microsoft are dominant suppliers of personal financial software. Intuit,
Inc. is also H&R Block's primary competitor in the online tax preparation
market. BFC expects increased competition in this area as more competitors enter
the online market or existing providers of online tax preparation services
consolidate.
Government Regulation. Several states have enacted, or have considered,
legislation regulating commercial tax return preparers. Primary efforts toward
the regulation of such preparers have historically been made at the Federal
level. Federal legislation requires income tax return preparers to, among other
things, set forth their signatures and identification numbers on all tax returns
prepared by them, and retain for three years all tax returns prepared. Federal
laws also subject income tax return preparers to accuracy-related penalties in
connection with the preparation of income tax returns. Preparers may be enjoined
from further acting as income tax return preparers if the preparers continuously
and repeatedly engage in specified misconduct. With certain exceptions, the
Internal Revenue Code also prohibits the use or disclosure by income tax return
preparers of certain income tax return information without the prior written
consent of the taxpayer. In addition, the Gramm-Leach-Bliley Act and Federal
Trade Commission regulations adopted thereunder require tax preparers to adopt
and disclose consumer privacy policies, and provide consumers a reasonable
opportunity to "opt out" of having personal information disclosed to
unaffiliated third parties for marketing purposes.
The Company believes that the Federal legislation regulating commercial
tax return preparers has not had and will not have a material adverse effect on
the operations of H&R Block. In addition, no present state statutes of this
nature have had a material adverse effect on the business of H&R Block. However,
the Company cannot predict what the effect may be of the enactment of new
statutes or adoption of new regulations.
The Federal government regulates the electronic filing of income tax
returns in part by specifying certain criteria for individuals and businesses to
participate in the government's electronic filing program for U.S. individual
income tax returns. Individuals and businesses must, upon application, be
accepted into the electronic filing program. Once accepted, electronic filers
must comply with all publications and notices of the IRS applicable to
electronic filing, provide certain information to the taxpayer, comply with
advertising standards for electronic filers, and be subjected to possible
monitoring by the IRS, penalties for disclosure or use of income tax return
preparation and other preparer penalties, and suspension from the electronic
filing program.
The Federal statutes and regulations also regulate an electronic
filer's involvement in refund anticipation loans. Electronic filers must clearly
explain that the refund anticipation loan is a loan and not a substitute for or
a quicker way of receiving an income tax refund. The Federal laws place
restrictions on the fees that an electronic filer may charge in connection with
refund anticipation loans.
States that have adopted electronic filing programs for state income
tax returns have also enacted laws that regulate electronic filers. In addition,
some states and localities have enacted laws and adopted regulations that
regulate refund anticipation loan
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facilitators and/or the advertisement and offering of electronic filing and
refund anticipation loans.
The Company believes that the Federal, state and local legislation
regulating electronic filing and the facilitation of refund anticipation loans
has not, and will not in the future have a material adverse effect on the
operations of H&R Block. However, the Company cannot predict what the effect may
be of the enactment of new statutes or the adoption of new regulations
pertaining to electronic filing and/or refund anticipation loans.
The repayment of RALs generally depends on IRS direct deposit
procedures. The IRS may from time to time change its direct deposit procedures
or may determine not to make direct deposits of all or portions of a borrower's
Federal income tax refund. The failure of the IRS to make direct deposits of
refunds may impair the lender's ability to collect a RAL and result in a loss to
BFC in connection with its purchases of interests in RALs and a loss to Tax
Services for tax preparation fees not collected. However, the Company believes
that Federal statutes and regulations regulating electronic filing and RALs have
not had and will not have a material adverse effect on the operations of BFC or
Tax Services. However, the Company cannot predict what the effect may be of the
enactment of new Federal or state statutes or the adoption of new regulations.
As noted above under "Owned and Franchised Offices," many of the income
tax return preparation offices operating in the United States under the name
"H&R Block" are operated by franchisees. Certain aspects of the
franchisor/franchisee relationship have been the subject of regulation by the
Federal Trade Commission and by various states. The extent of such regulation
varies, but relates primarily to disclosures to be made in connection with the
grant of franchises and limitations on termination by the franchisor under the
franchise agreement. To date, no such regulation has materially affected the
business of the Company's subsidiaries. However, the Company cannot predict what
the effect may be of the enactment of new statutes or adoption of new
regulations pertaining to franchising.
From time to time, and especially in election years, the subjects of
tax reform, tax simplification, the restructuring of the tax system, a flat tax,
a consumption tax, a value-added tax or a national sales tax surface. While each
flat tax proposal and most other tax simplification proposals have fallen short
of adoption, such issues have received serious attention in recent years.
Historically, changes in tax laws have increased H&R Block's business. The
immediate result of tax law changes has been an increase in complexity. The
transition from the current system to a new, untested system is likely to take a
number of years and, under most serious tax reform proposals, Americans will
still need to file Federal and state tax returns. The Company believes that
clients will still come to H&R Block for convenience, accuracy and answers to
tax questions. However, if enacted, the effect of tax reform or simplification
legislation on the business of the Company's subsidiaries over time is
uncertain, and such legislation could have a material adverse effect on the
Company's business, financial position and results of operations.
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INTERNATIONAL TAX OPERATIONS
Generally. This operating segment provides the preparation of tax
returns, electronic filing and related services to the general public
principally in Canada, Australia and the United Kingdom. Tax preparation of U.S.
tax returns and related services are offered by franchisees in nine countries.
The electronic filing of U.S. income tax returns is offered at franchised
offices located in Europe, and the electronic filing of Australian, Canadian and
United Kingdom income tax returns is offered at H&R Block offices in Australia,
Canada and the United Kingdom, respectively.
The returns prepared at 1,378 company-owned and franchised offices in
countries outside of the United States constituted 12.2% of the total returns
prepared by H&R Block in the last fiscal year (compared to 12.3% in fiscal year
2000 and 12.8% in fiscal year 1999).
Canadian Operations. H&R Block Canada, Inc. ("Block Canada") and its
franchisees prepared approximately 1,752,000 Canadian regular and discounted
returns filed with Revenue Canada during the 2001 income tax filing season,
compared to 1,805,000 Canadian returns prepared during fiscal year 2000, and
1,858,000 Canadian returns prepared in fiscal 1999. The number of offices
operated by Block Canada and its franchisees decreased in fiscal year 2001 to
944 from 966 in fiscal year 2000 (1,032 in 1999). Of the 944 offices in Canada,
489 were owned and operated by Block Canada and 455 were owned and operated by
franchisees. Block Canada operated 122 offices in department stores in Canada in
fiscal year 2001, including 76 offices in Sears' facilities. In fiscal 2000,
Block Canada operated 142 offices in department stores in Canada (compared to
164 offices in fiscal year 1999), including 79 offices in Sears' facilities
(compared to 86 offices in fiscal year 1999).
Block Canada and its franchisees offer a refund discount ("CashBack")
program to their customers in Canada. Canadian law specifies the procedures
which Block Canada must follow in conducting the program. In accordance with
current Canadian regulations, if a customer's tax return indicates that such
customer is entitled to a tax refund, a check is issued by Block Canada to the
client for an amount which is equal to the sum of (i) 85% of that portion of the
anticipated refund which is less than or equal to $300 and (ii) 95% of that
portion of the refund in excess of $300. The client assigns to Block Canada the
full amount of the tax refund to be issued by Revenue Canada. The refund check
is then sent by Revenue Canada directly to Block Canada, which then deposits the
refund check into its bank account. In accordance with the law, the discount is
deemed to include both the tax return preparation fee and the fee for tax refund
discounting. This program is financed by short-term borrowings. In some parts of
Canada, CashBack services are offered at offices identified as "H&R Block
Express." The number of returns discounted under the CashBack program in fiscal
year 2001 was approximately 532,000, compared to 547,000 in fiscal year 2000 and
516,000 in fiscal year 1999.
Block Canada also provides check cashing and other low-end financial
services through its subsidiary Cashplan Systems Inc. These services are offered
in offices operated under the name "Financial Stop," where no tax return
preparation services are offered, as well as in some H&R Block Express offices.
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Australian Operations. The number of returns prepared by H&R Block
Limited, the Company's indirect subsidiary in Australia, and by franchisees in
Australia, increased to approximately 486,000 from 455,000 in fiscal year 2000
and 428,000 in fiscal 1999. The number of offices operated by H&R Block in
Australia in fiscal year 2001 was 350, compared to 349 offices in fiscal year
2000 and 347 offices operated in fiscal year 1999. Of the 350 offices, 245 were
owned and operated by H&R Block Limited and 105 were franchised offices.
United Kingdom Operations. The Tax Team Limited, an indirect subsidiary
of the Company, provides tax return preparation services in the United Kingdom.
The Tax Team Limited operated 23 offices in fiscal year 2001, compared to 26
offices operated in fiscal years 1999 and 2000.
Seasonality of Business. Revenues in this segment are seasonal in
nature with peak revenues occurring during the applicable tax season (January
through April in Canada; July through October in Australia; and August through
March in the United Kingdom).
Competitive Conditions. The tax return preparation business is highly
competitive, with a substantial number of firms offering tax preparation
services. Block Canada and H&R Block Limited believe that they each operate the
largest tax return preparation business in their respective countries. The Tax
Team Limited believes that it is one of the largest providers of tax preparation
services in the United Kingdom.
Government Regulation. Statutes and regulations relating to income tax
return preparers, electronic filing, franchising and other areas affecting the
income tax business also exist outside of the United States. In addition, the
Canadian government regulates the refund discounting program in Canada, as
discussed under "Canadian Operations," above. These laws have not materially
affected the international tax operations conducted by subsidiaries of the
Company.
MORTGAGE OPERATIONS
Generally. Mortgage operations originate, service, and sell conforming
and nonconforming mortgage loans in the United States. Conforming mortgages are
those that may be offered through government sponsored loan agencies.
Nonconforming mortgages are those that may not be offered through
government-sponsored loan agencies and typically involve borrowers with impaired
credit and have substantial equity in the property which will be used to secure
the loan. Retail and wholesale mortgage origination services were offered in
fiscal year 2001 through a network of 16,453 mortgage brokers in 31 offices.
Option One Mortgage Corporation. Option One, based in Irvine,
California, has a network of more than 16,000 mortgage brokers in 48 states.
Option One originates loans through wholesale and retail channels. Option One
originated $6.5 billion in mortgage loans in fiscal year 2001, compared to $5.7
billion in fiscal year 2000 and approximately $3.6 billion in fiscal year 1999.
The average Option One loan during fiscal year 2001 had a $108,800 principal
balance (compared to $106,700 in fiscal year 2000 and $108,000 in fiscal
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year 1999), and was secured by a first lien on a single-family residence. During
fiscal 2001, Option One sold approximately $6.0 billion of mortgage loans,
compared to $6.1 billion sold in fiscal 2000 and $3.6 billion in fiscal 1999. At
the end of fiscal year 2001, Option One's servicing portfolio was 173,900 loans
totaling more than $18.2 billion, compared to 114,300 loans totaling $11.3
billion at the end of fiscal 2000 and 65,300 loans totaling $6.5 billion at the
end of fiscal 1999.
Wholesale originations represented the substantial majority of Option
One's total loan production. Wholesale loan originations involve a broker who
assists the borrower in completing the loan application, the gathering of
necessary information and identifying a lender that offers a loan product which
is best suited to the borrower's financial needs. Brokers are free to submit an
application to one or more nonconforming lenders, such as Option One. Upon
receipt of an application from a broker, Option One's branch office processes
and underwrites the loan. Based upon this review, Option One advises the broker
whether the loan application meets Option One's underwriting guidelines and
product description by issuing a loan approval or denial, and in some cases,
issues a "conditional approval," which requires the submission of additional
information or clarification. Option One sells virtually all of its loan
production through bulk sales of whole loans to institutional purchasers.
The Company utilizes off-balance sheet arrangements to fund its
subprime production. Option One had commitments from three banks totaling $2
billion for external warehouse financing for its subprime mortgage production
during most of fiscal year 2001. Option One received commitments in April 2001
from two banks totaling $2 billion for external warehouse financing for its
subprime mortgage production over a 12-month period beginning in April 2001.
H&R Block Mortgage Corporation. H&R Block Mortgage is a retail mortgage
lender for conventional, non-conventional and government loans and is licensed
to conduct business in 50 states. H&R Block Mortgage is an approved
seller/servicer for Fannie Mae and Freddie Mac and is HUD authorized to
originate and underwrite FHA and VA mortgage loans. In fiscal year 2001, H&R
Block Mortgage originated retail mortgage loans from various sales channels,
including 35 branch offices in 15 states, and two regional call centers located
in Tampa, Florida and Pleasanton, California, and by teaming with E-Loan over
the Internet at www.hrblock.com. See "E-Commerce Initiatives" under "U.S. Tax
Operations," above.
In April 2000, H&R Block Mortgage entered into a strategic alliance
with Countrywide Home Loans, Inc. ("Countrywide") to sell 90% of its qualifying
conforming mortgage loans to Countrywide. The majority of mortgage loans sold to
Countrywide are underwritten through an automated system under which H&R Block
Mortgage's representations and warranties relating to compliance with
Countrywide's underwriting guidelines are assumed by Countrywide. This alliance
allows H&R Block Mortgage, on average, an increase of 50 basis points in
execution due to price, efficiencies in delivery, and elimination of
redundancies in operations.
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Service Marks and Trademarks. Option One claims ownership of the
following service marks and trademarks registered on the principal register of
the United States Patent and Trademark Office:
AppOne
CorOne
Highway 1
HouseKeeper
No Sweat 95!
Option One and Design
PartnerPlus
SumOne
The Big 2
Competitive Conditions. Both the conventional and subprime sectors of
the residential mortgage loan market are highly competitive. The principal
methods of competition are in service, quality and price. There are a
substantial number of companies competing in the residential loan market,
including mortgage banking companies, commercial banks, savings associations,
credit unions and other financial institutions. No one firm is a dominant
supplier of conforming and nonconforming mortgage loans.
Seasonality of Business. Residential mortgage volume is subject to
seasonal trends, with real estate sales being generally lower in the first
calendar quarter of the calendar year, peaking in the spring and summer seasons,
and then declining again in November and December. Accordingly, the revenues of
the mortgage operations reporting segment are generally higher in the peak
months, but the seasonal trends do not have a material impact on overall results
of the Company.
Government Regulation. The Company believes that Federal and state
statutes and regulations, as well as county and municipal regulations and
ordinances, governing mortgage lending have not had and will not have a material
adverse effect on the operations of its mortgage subsidiaries. However, the
Company cannot predict what the effect may be of the enactment of new state or
Federal statutes or municipal ordinances, or the adoption of new Federal, state
or county regulations.
Applicable state laws generally regulate interest rates, other than
first mortgage loans which are subject to a Federal preemption of all state
usury laws, and other charges, require certain disclosures and, unless an
exemption is available, require licensing of the originators of certain mortgage
loans. In addition, most states have other laws, public policies and general
principles of equity relating to the protection of consumers, unfair and
deceptive practices, and practices that may apply to the origination, servicing
and collection of mortgage loans.
During fiscal year 2001, there was a noticeable increase in state,
county and municipal statutes, ordinances and regulations which prohibit or
regulate "Predatory Lending" practices. "High-Cost Loans" are defined separately
by each state, county or municipal statute, regulation or ordinance, but
generally include mortgage loans that have interest rates that exceed a
specified margin over the Treasury Index for a comparable
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maturity, or exceed a designated percentage of points and fees. Statutes,
ordinances and regulations that regulate High-Cost Loans generally prohibit
mortgage lenders from engaging in certain defined practices, or require mortgage
lenders to implement certain practices, in connection with any mortgage loans
that fit within the definition of a High-Cost Loan. For example, many such laws
and regulations prohibit mortgage lenders from imposing a prepayment penalty in
connection with any mortgage loan that fits within the definition of a High-Cost
Loan or require mortgage lenders to demonstrate a tangible net benefit to the
Borrower as a result of the Borrower's entering into the mortgage loan
transaction involving a High-Cost Loan.
The mortgage loans purchased or originated by the Company's mortgage
subsidiaries are also subject to Federal laws and regulations, including,
without limitation, the Federal Truth-in-Lending Act, as amended, and Regulation
Z promulgated thereunder, the Equal Credit Opportunity Act, as amended, and
Regulation B promulgated thereunder, the Fair Credit Reporting Act, as amended,
the Federal Real Estate Settlement Procedures Act, as amended, and Regulation X
promulgated thereunder, the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended, the Home Mortgage Disclosure Act and Regulation C promulgated
thereunder, the Federal Fair Housing Act and certain other laws and regulations.
Under environmental legislation and case law applicable in certain states, it is
possible that liability for environmental hazards in respect of real property
may be imposed on a holder of a mortgage note secured by real property.
INVESTMENT SERVICES
Generally. The investment services operating segment provides
investment advice, brokerage services and financial planning primarily through
H&R Block Financial Advisors, Inc. (formerly OLDE Discount Corporation). In
December 1999, the Company acquired OLDE Financial Corporation ("OLDE
Financial"), a Detroit-based financial services holding company that is the
parent company of HRBFA. OLDE Discount Corporation was rebranded during fiscal
year 2001 by changing its name to H&R Block Financial Advisors, Inc. effective
August 1, 2000.
HRBFA is a registered broker-dealer with the SEC and is a member of the
New York Stock Exchange ("NYSE"), other national securities exchanges and the
National Association of Securities Dealers, Inc. ("NASD"). HRBFA is one of the
largest retail investment firms in the United States offering financial advice
and other financial services to retail clients at discounted commission rates
through its network of financial advisors in HRBFA branch offices.
Although HRBFA accounts for its revenues and expenses on a calendar
fiscal year basis and had record revenues for its fiscal year 2000, like other
brokerage firms, it suffered from declining activity by retail investors during
the Company's 2001 fiscal year and a corresponding decline in margin balances.
In line with the market decline, average trading volumes fell during the year by
more than 46% as measured by average trades per day. Impacted by market
performance, volatility and investor uncertainty, and consistent with the rest
of the industry, margin balances at HRBFA had fallen by the end of fiscal year
2001 from an average of $2,415 million to $1,288 million.
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In an effort to reduce expenses to counteract reduced revenues, HRBFA
reduced approximately six percent of its total workforce in non-advisor
positions in April 2001. Several support functions at HRBFA were consolidated
and aligned with corresponding departments within other subsidiaries of the
Company.
Despite the difficult financial and market environment, HRBFA
successfully rebranded the business and expanded its product line, online
capabilities and level of service to clients during fiscal year 2001.
HRBFA Brokerage and Other Services. HRBFA is a full service securities
broker-dealer providing a full range of financial services to its clients in the
United States. It typically effects transactions for its clients at commission
rates lower than the rates full-commission brokerage firms charge. Revenues from
HRBFA's brokerage activities are generated through client purchases and sales of
stocks, investment-grade fixed income products, options, mutual funds,
investment trusts, and other financial products. Commissions may be charged on
both listed and over-the-counter ("OTC") transactions executed on an agency
basis. HRBFA also offers services and products typically offered by traditional
full-commission firms, such as investment research with regard to individual
securities and goal-oriented financial planning. Other services and products
offered include money market funds with sweep provisions for settlement of
client transactions; margin accounts; checking privileges; option accounts;
dividend reinvestment plans; and individual retirement accounts ("IRAs"). During
fiscal year 2001, HRBFA also expanded its product line to include the sale of
annuities in several states.
During the 2001 tax season, H&R Block tax clients in 14 states were
given the opportunity to open an Express IRA through HRBFA as a part of the tax
return preparation process. Clients were able to open an Express IRA by simply
using all or part of their tax refund or by writing a personal check for the IRA
amount. The Express IRA is invested in an FDIC Insured money market account
through Reserve Management Corporation at an insured depository institution
paying competitive money market interest rates. Clients funded approximately
25,000 Express IRAs in fiscal year 2001.
After year-end, HRBFA introduced to account holders a service that
makes it possible for clients to handle all of their investment and banking
activities from one convenient, flexible brokerage account with cash management
features. The cash management features include no-minimum checking, unlimited
check writing, a credit interest program that allows interest to be earned on
balances over $100, a variety of money market fund options, a VISA(R) Gold
ATM/check card with a 1% cash rebate on card purchases and an airline miles
program, one consolidated monthly statement and a year-end account summary.
HRBFA also began offering college savings products - called 529 Plans - through
state-sponsored investment programs that allow clients to make tax-free
withdrawals for qualified education expenses after December 31, 2001.
Dealer and Market Making Activities. HRBFA is also a dealer and engages
in market making activities in common stocks, regularly trading in securities on
a principal basis and for its own account in the National Association of
Securities Dealers Automated Quotation System ("NASDAQ"), OTC market and on
regional stock exchanges. HRBFA acts as a qualified dealer in certain listed
securities on the Cincinnati Stock Exchange. In
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addition, HRBFA regularly trades in corporate and municipal bonds, various U.S.
Government and U.S. Government Agency securities and certificates of deposit.
When HRBFA executes transactions as a dealer on a principal basis, it
may charge mark-ups or mark-downs which are equivalent to its commission
schedule. Under certain circumstances, customers with an account minimum of
$500,000 in equity may be eligible to effect common stock transactions in which
commissions, mark-ups and/or mark-downs are not charged. HRBFA selects the
stocks in which it makes a market based upon fundamental and market factors. For
those stocks in which HRBFA makes a market, it may derive revenue from the
spread, which is the difference between the bid and offer prices. However, due
to the nature of the activity and the volatility of the securities markets,
HRBFA may realize losses as a result of adverse market fluctuations.
Financial Advisor Compensation. Financial advisors receive compensation
in a combination of plans in the form of commissions on HRBFA's revenues from
customer transactions, a salary or draw against commissions and/or may receive
additional compensation on customer transactions in securities recommended by
HRBFA or for which HRBFA provides research as a result of the firm's market
making activities.
Tax Professional Financial Advisors. During fiscal year 2001, the
Company's subsidiaries further tested and expanded the Tax Professional
Financial Advisor ("TPFA") program, by which H&R Block tax professionals expand
their roles to provide financial services to tax clients. TPFAs have licenses to
sell mutual funds and/or insurance products and in some instances, equity
securities recommended by HRBFA. The number of TPFAs grew from 150 to more than
430 during the 2001 fiscal year and they provided investment services to more
than 3,000 tax clients. The TPFAs were registered representatives of Birchtree
Financial Services, Inc., an indirect subsidiary of the Company and an
investment firm headquartered in Kansas City, Missouri. In fiscal year 2002, the
TPFAs will become financial advisors licensed with HRBFA.
Integrated Online Services. HRBFA provides an online investment center
through the Company's web site located at www.hrblock.com. HRBFA provides online
users the opportunity to open accounts, obtain research, create financial plans,
buy and sell securities, and view the status of their accounts online. The
online financial planning service gives HRBFA clients the ability to create and
view a personal financial plan while simultaneously receiving advice by
telephone from an H&R Block financial advisor who is viewing the same
information. Clients can create, view or edit a financial plan for many
different life-changing events such as retirement, college, a new child or the
purchase of a house. After developing a plan, clients have the option to allow
an advisor to execute the plan or they can do it themselves at the investment
center. Through April 2001, approximately 96,000 accounts had been web enabled
and, in April 2001, more than 7,000 securities transactions were effected
online. Additional information regarding online operations is provided under the
"E-Commerce Initiatives" in the "U.S. Tax Operations" section, above.
Advertising and Marketing. Advertising and marketing play a significant
role in the expansion of HRBFA's client base as well as the introduction of new
products and services. HRBFA may use a combination of media including
newspapers, magazines, the
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yellow pages, television, and its Internet home page to advertise and market
its products and services. When an investor contacts HRBFA, the investor
receives a package of information including an account application and a
brochure containing information on the services and products offered by HRBFA.
Additional detailed information is available upon request and can be tailored to
match the client's investment preferences.
Retail Branch Offices. HRBFA is authorized to do business as a
broker-dealer in all 50 states and the District of Columbia. At fiscal year end,
HRBFA operated in 525 offices, compared to 198 offices at the end of fiscal year
2000. Some HRBFA offices offer, in addition to financial products and services,
tax preparation and, in a limited number of offices, mortgage services,
year-round to clients. HRBFA believes that the existence of branch offices
contributes to its growth and client satisfaction. The existence of a branch
office generally results in an increase in unsolicited customer transactions in
the geographic area near the office. Many clients prefer to conduct business in
person in local rather than in distant offices or online. Clients may use branch
offices to receive and deliver checks and deliver securities.
Service Marks and Trademarks. HRBFA claims ownership of the following
service marks and trademarks registered on the principal register of the United
States Patent and Trademark Office:
Chevron Design SmartTrading
IRA United SmartTravel
The OLDE Investors Account SmartVest
SmartBroker SmartVestor
SmartRetirement SmartViews
SmartTrade SmartWire
HRBFA also claims ownership of the following unregistered trademark:
The Easy Way to Financial Success
Competitive Conditions. HRBFA competes directly with a broad range of
companies seeking to attract consumer financial assets, including full-service
discount brokerage firms, discount and online brokerage firms, mutual fund
companies, investment banking firms, commercial and savings banks, insurance
companies and others. The financial services industry has become considerably
more concentrated as numerous securities firms have been acquired by or merged
into other firms. Some of these competitors have greater financial resources
than HRBFA and offer certain additional financial products and services. In
addition, HRBFA expects competition from domestic and international commercial
banks to continue to increase as a result of legislative and regulatory
initiatives in the U.S. (including the passage of the Gramm-Leach-Bliley Act in
November 1999) to remove or relieve certain restrictions on mergers between
commercial banks and other types of financial services providers. HRBFA
primarily competes with these firms on quality of service, breadth of products
and services offered, prices, accessibility through delivery channels, and
technological innovation and expertise.
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Discount brokerage firms and online-only financial services providers
compete vigorously with HRBFA with respect to commission charges.
Full-commission brokerage firms also offer more product breadth, discounted
commissions and on-line services to selected retail brokerage customers. In
addition, some competitors in both the full-commission and discount brokerage
industries have substantially increased their spending on advertising and direct
solicitation of customers.
Competition in the online trading business has become similarly intense
as recent expansion and customer acceptance of conducting financial transactions
online has attracted new brokerage firms to the market. Price competition
continues to intensify in online investing as traditional brokerage firms have
entered the market and existing competitors have aggressively sought to gain
market share.
Seasonality of Business. The investment services operating segment does
not, as a whole, experience significant seasonal fluctuations. However, the
securities business is cyclical, directly affected by national and world
economic and political conditions, trends in business and finance and changes in
the conditions of the securities markets in which HRBFA's clients trade.
Government Regulation. The securities industry is subject to extensive
regulation covering all aspects of the securities business, including
registration of HRBFA's offices and personnel, sales methods, the acceptance and
execution of customer orders, the handling of customer funds and securities,
trading practices, capital structure, record keeping policies and practices,
margin lending, execution and settlement of transactions, the conduct of
directors, officers and employees, and the supervision of employees. The various
governmental authorities and industry self-regulatory organizations which have
supervisory and regulatory jurisdiction over the Company's broker-dealer
subsidiaries generally have broad enforcement powers to censure, fine, issue
cease-and-desist orders or suspend or expel a broker-dealer or any of its
officers or employees who violate applicable laws or regulations.
The Securities and Exchange Commission is the federal agency
responsible for the administration of the federal securities laws. HRBFA is
registered as broker-dealer, and OLDE Asset Management, Inc., a subsidiary of
OLDE Financial, is a registered investment adviser with the SEC. Much of the
regulation of broker-dealers has been delegated by the SEC to self-regulatory
organizations, principally the Municipal Securities Rulemaking Board, the NASD
Regulation, Inc. and the New York Stock Exchange ("NYSE"), which has been
designated as HRBFA's primary regulator. These self-regulatory organizations
adopt rules (subject to approval by the SEC) that govern the industry and
conduct periodic examinations of the operations of HRBFA's brokerage and
clearing activities. Securities firms are also subject to regulation by state
securities administrators in those states in which they conduct business.
As a registered broker-dealer, HRBFA is subject to the net capital rule
(Rule 15c3-1) promulgated by the SEC and adopted through incorporation by
reference in NYSE Rule 325. The Rule, which specifies minimum net capital
requirements for registered brokers and dealers, is designed to measure the
financial soundness and liquidity of a broker-dealer and requires at least a
minimum portion of its assets be kept in liquid form.
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HRBFA has elected to compute net capital under the alternative method
of computation permitted by Rule 15c3-1 which required that net capital be not
less than the greater of $1,000,000 or 2% of combined aggregate debit balances
(primarily receivables from customers and other broker-dealers). In computing
net capital, various deductions are made from net worth and qualifying
subordinated indebtedness. These deductions include the book value of assets not
readily convertible into cash and prescribed percentages of securities owned or
sold short.
Any failure of HRBFA to maintain the required minimum net capital may
subject HRBFA to suspension or revocation of registration or other limitations
on the firm's activity by the SEC, and suspension or expulsion by the NYSE, NASD
or other regulatory bodies, and ultimately could require the broker-dealer's
liquidation. HRBFA could also be prohibited from paying dividends or redeeming
stock. HRBFA would be prohibited from prepaying or making payments of principal
on subordinated indebtedness if its net capital were to become less than the
greater of 5% of combined aggregate debit balances or $1,000,000. Under NYSE
Rule 326, HRBFA is required to reduce its business if its net capital is less
than 4% of aggregate debit balances and is prohibited from expanding business or
redeeming subordinated indebtedness if its net capital is less than 5% of its
aggregate debit balances. Net capital rules could limit HRBFA's ability to
engage in new activities and expansion, and could restrict the Company's ability
to withdraw capital from its brokerage subsidiaries. Such a restriction in turn,
could limit the Company's ability to repay or reduce indebtedness (including
subordinated debentures of the Company) and pay dividends. Further, a
significant operating loss or an extraordinary charge against net capital could
adversely affect HRBFA's ability to expand or maintain its current levels of
business. At April 30, 2001, HRBFA's net capital of $257.7 million, which was
18.8% of aggregate debit items, exceeded by $230.3 million its minimum required
net capital of $27.4 million. HRBFA made a capital withdrawal to BFC of $50
million at fiscal year-end.
BUSINESS SERVICES
Generally. The business services operating segment, which is conducted
primarily through RSM McGladrey, Inc., a direct subsidiary of HRB Business
Services, Inc. ("HRBBS"), provides accounting, tax and consulting services to
business clients, primarily mid-sized companies, and tax, estate planning and
financial planning services to individuals in the United States through a
network of more than 100 offices.
In addition to providing these services to the public, RSM and certain
other subsidiaries involved in the business services segment provide management
and administrative services to the public accounting firms from which non-attest
assets have been acquired. RSM and certain other subsidiaries receive fees from
the public accounting firms, which continue to provide to the public "attest"
services that constitute the practice of public accounting which H&R Block and
its subsidiaries, by regulation, generally cannot provide.
RSM McGladrey, Inc. RSM has more than 100 offices and offers services
in 13 of the top 25 U.S. markets through its staff of more than 2,800 employees,
which includes more than 480 managing directors. RSM is also linked with more
than 80 independently
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owned CPA firms in the United States and Puerto Rico through the McGladrey
Network. In addition, RSM is the U.S. member of RSM International, the seventh
largest accounting and consulting organization in the world, with 550 offices in
75 countries.
During the past fiscal year, the Company integrated five of its
previously acquired regional accounting firms into RSM. Prior to the McGladrey
acquisition, HRBBS, either directly or through its direct subsidiaries, had
acquired regional accounting firms in Kansas City, Chicago, Indianapolis,
Buffalo, Dallas, Baltimore, and Philadelphia.
On October 2, 2000, RSM purchased the non-attest assets of Edward
Isaacs & Company, LLP ("EICO"), a firm with offices in New York City and White
Plains, New York. EICO's acquired operations were combined with RSM's existing
New York City practice, creating offices with a staff of more than 300 people
and making it one of the area's largest firms providing business advisory
services for mid-sized companies.
On December 1, 2000, RSM acquired the non-attest assets of Keller
Bruner & Company, LLP ("Keller Bruner"), one of the Washington, D.C. area's
largest regional tax, accounting and consulting firms, with offices in Bethesda
and Frederick, Maryland and Alexandria, Virginia.
Other acquisitions by RSM in fiscal year 2001 enabled it to strengthen
its presence in Des Moines, Iowa and expand its operations to Boston,
Massachusetts.
On December 31, 2000, the Company sold substantially all of the assets
of its wholly-owned, indirect subsidiary, KSM Business Services, Inc. ("KSM"),
an Indianapolis-based tax, accounting and consulting firm, to KSM Services,
Inc., an entity formed by the partners of Katz Sapper & Miller, LLP. KSM had
acquired the non-attest assets of Katz Sapper & Miller, LLP in November 1998.
The 1998 acquisition was the third regional accounting firm acquisition made by
the Company prior to its August 1999 acquisition of the non-attest assets of
McGladrey & Pullen, LLP ("McGladrey").
McGladrey's attest business (including audit, reviews and other
engagements in which the firm issues written opinions evaluating client
financial statements) remains in a partnership owned by the McGladrey & Pullen
LLP partners and is accordingly a separate company.
Until recently, the SEC had no published rules on the application of
the auditor independence rules to firms such as McGladrey, whose partners are
also employed by RSM. On February 5, 2001, revised SEC auditor independence
rules that apply to the accounting firm and its "associated entities" became
effective. The SEC staff has advised McGladrey that it considers the Company and
all of its subsidiaries to be associated entities. Accordingly, any financial
interest or business relationship of the Company with a client of McGladrey that
is subject to the SEC's auditor independence rules (an SEC Audit Client) will be
regarded by the SEC staff as a financial interest or business relationship
between McGladrey and the SEC Audit Client. Under the SEC's auditor independence
rules, McGladrey and its partners are precluded from holding certain financial
interests in and entering into certain business relationships with an SEC Audit
Client for whom McGladrey performs audit services.
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In connection with the evaluation of the regulatory restrictions and
environment, the Company and McGladrey have had discussions with the staff of
the SEC regarding appropriate disclosure of the policy and procedures that have
been implemented by McGladrey, RSM and the Company to safeguard McGladrey's
independence and integrity as an audit firm in compliance with applicable
regulations and professional responsibilities.
The Company and McGladrey have enacted certain policies and controls to
monitor and prevent violations by them of the SEC's auditor independence rules
as interpreted by the SEC staff. These policies and controls include the
following:
- The Company has informed the management of each of its business units
of the SEC staff's interpretation that certain financial interests and
business relationships with McGladrey SEC Audit Clients are prohibited
in as much as they would be deemed to impair McGladrey's independence
as an auditor.
- McGladrey's Independence and Relationship Policies and the Code of
Professional Conduct promulgated by the American Institute of Certified
Public Accountants ("AICPA"), which address auditor independence
issues, have been distributed to all of the Company's executive
officers and directors.
- McGladrey's Prohibited Securities List, which lists securities of
McGladrey SEC Audit Clients, is distributed to the Company's executive
officers and directors on a monthly basis so that they can monitor
compliance by the business units for which they are responsible.
- Each of the Company's executive officers, directors and affiliates
submits an Independence Compliance Questionnaire ("Questionnaire") that
addresses auditor independence issues. Each Questionnaire is reviewed
by McGladrey's partner responsible for independence matters.
- McGladrey informs the audit committee of each SEC Audit Client, in
writing, of the SEC staff's interpretation regarding the attribution to
McGladrey, for purposes of McGladrey's auditor independence of the
financial interests and business relationships of the Company with SEC
Audit Clients.
- McGladrey informs the audit committee of each SEC Audit Client of the
SEC staff's interpretation that ownership of the Company's stock by
such SEC Audit Client or ownership of more than 5% of the Company's
stock by its officers or directors would affect McGladrey's
independence as an auditor, and McGladrey obtains representations from
each SEC Audit Client that it owns no shares of the Company.
- McGladrey has designated a partner responsible for independence matters
who reports directly to its Managing Partner. The partner responsible
for independence matters monitors changes in independence standards
promulgated by the AICPA, the Independence Standards Board ("ISB",
which is being disbanded) and the SEC. This partner periodically
recommends corresponding modifications to McGladrey's Independence
Relationship Policies that become effective upon the approval of
McGladrey's Board of Directors.
- RSM has agreed to comply and cause its employees to comply with the
Independence and Relationship policies of McGladrey.
- Employees of RSM and employees of McGladrey are informed of changes to
McGladrey's Independence and Relationship Policies and its Prohibited
Securities List on a monthly basis via electronic bulletin boards.
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- Employees of RSM and partners and employees of McGladrey periodically
complete an Independence Compliance Questionnaire that is reviewed and
approved by McGladrey's National Office of Audit & Accounting. All
exceptions are reviewed by and approved by McGladrey's partner
responsible for independence matters, its Managing Partner and its
Board of Directors.
- As mandated by its membership in the SEC Practice Section of the AICPA,
McGladrey has implemented independence training programs and programs
to test compliance with its Independence and Relationship Policies and
the completeness and accuracy of Independence Compliance
Questionnaires.
- McGladrey has established consultation procedures for the resolution of
all identified exceptions to its policies and AICPA, ISB or SEC
independence requirements. The Company and RSM have agreed to cooperate
fully with McGladrey in the resolution of all exceptions and the
implementation of any remedial actions, including disciplinary actions.
While the Company and McGladrey believe that their policies and
controls in place regarding auditor independence are reasonable and adequate to
address the matters involved, there can be no assurance (and the SEC staff has
indicated that it cannot provide any assurance) that such policies and controls
will positively ensure complete compliance by the Company, RSM and McGladrey
with the SEC auditor independence rules as interpreted by the SEC staff. Any
noncompliance by the Company, RSM or McGladrey with such rules may impair
McGladrey's independence as an auditor of SEC Audit Clients and may adversely
affect the ability of McGladrey to attract and retain such clients and perform
audits of financial statements filed with the SEC.
Seasonality of Business. Revenues for this segment are seasonal in
nature, with peak revenues occurring during January through April.
Service Marks and Trademarks. RSM claims ownership of the following
unregistered service marks and trademarks:
Business Recovery Planning System
Business Continuity Planning System
E-Accounting
McGladrey Network
Market Builder
Personal Prosperity
Value Enhancement Solutions
FERS Business Services, Inc. ("FERS"), a wholly owned subsidiary of
RSM, claims ownership of the following service marks and trademarks registered
on the principal register of the United States Patent and Trademark Office:
Because Results Come First
Benelink
FERS Profit Edge
Tonelink
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FERS claims ownership of the following unregistered service mark and
trademark:
Pension Resources
Practice Development Institute, Inc., a direct subsidiary of HRBBS,
claims ownership of the following unregistered service marks and trademarks:
CPEC
Employment Law Briefing
PDI Practice Development Institute
Turning Your Firm's Potential Into Profit
Toback, Inc., a wholly owned subsidiary of RSM, claims ownership of the
following service marks and trademarks registered on the principal register of
the United States Patent and Trademark Office:
Solutions for Today. Strategies for Tomorrow.
The Local Firm with a National Reputation
Competitive Conditions. The accounting and consulting business is
highly competitive. There are a substantial number of accounting firms offering
similar services at the international, national, regional and local levels.
Government Regulation. Many of the same Federal and state regulations
relating to tax preparers and the information concerning tax reform discussed
above in "Government Regulation" section of "U.S. Tax Operations" apply to
Business Services as well, except that accountants are not subject to the same
prohibition on the use or disclosure of certain income tax return information as
the Tax Services income tax return preparers are. These accounting firms are
also subject to state and Federal regulations governing accountants, auditors
and financial planners. The Company believes that these state and Federal
regulations do not and will not have a material adverse effect on the operations
of the Company and its subsidiaries, but it cannot predict what the effect of
future regulations may be.
ITEM 2. PROPERTIES
The executive offices of the Company, H&R Block Services, Inc., Tax
Services, BFC and HRBBS are located at 4400 Main Street, Kansas City, Missouri,
in a multi-level building owned by Tax Services. The building was constructed in
1963 and expanded or redesigned in 1965, 1973, 1981, and 1996. In fiscal year
2000, H&R Block Tax Services, Inc. entered into a 20-year lease for a newly
constructed building located at 4400 East Blue Parkway, Kansas City, Missouri,
which is being utilized by Tax Services and its affiliates as a service center.
Most other offices of Tax Services (except those in department stores) are
operated in premises held under short-term leases providing fixed monthly
rentals, usually with renewal options. BFC also leases other office space in
Kansas City, Missouri.
Option One's executive offices are located in leased offices at 3 Ada,
Irvine, California. Option One also leases offices for its branch office
operations throughout the
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United States. H&R Block Mortgage is headquartered in leased offices in
Burlington, Massachusetts. H&R Block Mortgage also leases offices in Arizona,
California, Colorado, Connecticut, Florida, Illinois, Indiana, Massachusetts,
Maine, Michigan, New Hampshire, New Jersey, Ohio and Virginia.
The executive offices of HRBFA and OLDE Financial are located at 751
Griswold, Detroit, Michigan in a building owned by OLDE Financial. Many branch
offices of HRBFA are located in facilities owned by various real estate
subsidiaries of OLDE Financial and leased primarily to HRBFA. Some branch
offices are operated in leased premises.
RSM's executive offices are located in leased offices located at 3600
West 80th Street, Bloomington, Minnesota. Its administrative offices are located
in leased offices at 220 North Main Street, Davenport, Iowa. RSM also leases
office space in 21 states.
ITEM 3. LEGAL PROCEEDINGS
CompuServe Corporation ("CompuServe"), certain current and former
officers and directors of CompuServe and the Company were named as defendants in
six lawsuits pending before the state and Federal courts in Columbus, Ohio. All
suits alleged similar violations of the Securities Act of 1933 based on
assertions of omissions and misstatements of fact in connection with
CompuServe's public filings related to its initial public offering in April
1996. One state lawsuit brought by the Florida State Board of Administration
also alleged certain oral omissions and misstatements in connection with such
offering. Relief sought in the lawsuits is unspecified, but includes pleas for
rescission and damages. In July 1998, the state court certified a plaintiff
class of all persons and entities who purchased shares of common stock of
CompuServe between April 18, 1996 and July 16, 1996 pursuant to the initial
public offering or on the open market, and who were damaged thereby, excluding
the named defendants and their affiliates.
In July 2000, the class representatives and the defendants in the class
action pending in state court, by their authorized counsel, entered into a
Stipulation of Settlement, pursuant to which the defendants were required to pay
a gross settlement amount of $9.5 million in exchange for dismissal of the class
action suit and a release of all claims. The fairness hearing relating to the
settlement was held on November 30, 2000, and the court issued its order
approving the settlement. Payment of plaintiffs' attorneys' fees and expenses
were to be paid out of the gross settlement fund. The gross settlement fund was
paid in its entirety by the Company's insurance carrier. The Stipulation and the
payment of the gross settlement fund are not admissions of the validity of any
claim or any fact alleged by the plaintiffs and defendants continue to deny any
wrongdoing and any liability. The Stipulation states that the defendants
consider it desirable to settle to avoid further expense, inconvenience, and
delay, and to put to rest all controversy concerning all claims.
The Florida State Board of Administration opted out of the class action
settlement and that litigation continues separately from the state court class
action. The parties have reached a settlement that will dispose of the case in
its entirety with no material adverse impact on the Company's consolidated
financial position or results of operation.
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The Company and its subsidiaries are involved in various litigation and
claims as both defendant and plaintiff relating to matters which arise in the
normal course of business which management believes will not have a material
adverse effect on the Company's consolidated results of operations or financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended April 30, 2001.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The names, ages and principal occupations (for the past five years) of
the executive officers of the Company, each of whom has been elected to serve at
the discretion of the Board of Directors of the Company are as follows:
Name and age Office(s)
------------ ---------
Frank L. Salizzoni (63) Chairman of the Board of Directors
since September 2000; Chief Executive
Officer from June 1996 through
December 2000; President from June
1996 through September 1999; Member
of the Board of Directors since 1988.
See Note 1.
Mark A. Ernst (43) Chief Executive Officer since January
2001; President of the Company since
September 1999; Chief Operating
Officer from September 1998 through
December 2000; Executive Vice
President from September 1998 until
September 1999. See Note 2.
Jeffery W. Yabuki (41) Executive Vice President since
October 2000; President, H&R Block
Services, Inc. since October 2000;
President, H&R Block International
from September 1999 until October
2000. See Note 3.
David F. Byers (39) Senior Vice President and Chief
Marketing Officer since June 1999.
See Note 4.
Frank J. Cotroneo (42) Senior Vice President and Chief
Financial Officer since February
2000. See Note 5.
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<PAGE> 31
Name and age Office(s)
------------ ---------
Stephanie R. Otto (40) Senior Vice President, Human
Resources since July 2000; Vice
President, Human Resources August
1999 through June 2000; Vice
President, National Director of
Finance, HRB Business Services, Inc.,
October 1998 through August 1999;
Director, Internal Audit, December
1995 until October 1998.
Robert E. Dubrish (49) President and Chief Executive
Officer, Option One Mortgage
Corporation, since March 1996. See
Note 6.
Thomas P. Fitzgerald (44) Executive Vice President and Chief
Operating Officer, H&R Block
Financial Advisors, Inc. since July
7, 2000; Member of the Office of the
President, H&R Block Financial
Advisors, Inc. since December 2000;
Senior Vice President, General
Counsel and Head of Administration,
OLDE Discount Corporation, December
1999 until July 7, 2000. See Note 7.
Thomas G. Rotherham (51) Chief Executive Officer, RSM
McGladrey, Inc. since April 2000;
President, RSM McGladrey, Inc. since
August 1999; Chief Operating Officer,
RSM McGladrey, Inc. from August 1999
to April 2000. See Note 8.
Bernard M. Wilson (39) Senior Vice President, Financial
Services Group, Block Financial
Corporation since February 2000;
Senior Vice President and Member of
the Office of the President, H&R
Block Financial Advisors, Inc. since
December 2000; Vice President and
General Manager, Financial Services
Group, November 1998, Block Financial
Corporation, November 1998 through
December 2000. See Note 9.
Thomas L. Zimmerman (51) President, H&R Block Tax Services,
Inc., since June 1996; Executive Vice
President, Field Operations, H&R
Block Tax Services, Inc. from May
1994 through May 1996.
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Name and age Office(s)
------------ ---------
Cheryl L. Givens (35) Vice President and Corporate
Controller since July 1998; Assistant
Vice President and Assistant
Controller from October 1996 until
July 1998; Assistant Vice President
and Corporate Controller from June
1996 until October 1996.
James H. Ingraham (47) Vice President and General Counsel
since July 1999; Secretary since June
1990; Vice President, Legal from
October 1996 through June 1999;
Assistant Vice President, Corporate
Legal and Human Resources from
December 1995 until October 1996.
Linda M. McDougall (48) Vice President, Communications since
July 1999; Assistant Vice President,
Communications from November 1995
through June 1999.
Timothy R. Mertz (50) Vice President, Corporate Tax since
October 2000. See Note 10.
Brian N. Schell (35) Vice President and Treasurer since
December 1997; Senior Vice President
and Chief Financial Officer of H&R
Block Financial Advisors, Inc. since
July 2001; Director of Investor
Relations from November 1996 until
October 2000; Assistant Treasurer
from November 1996 until December
1997; Director of Corporate
Development from May 1995 until
December 1997.
Robert A. Weinberger (57) Vice President, Government Relations,
since March 1996.
Bret G. Wilson (42) Vice President, Corporate Development
and Risk Management since October
2000; Vice President, Corporate
Planning and Development from
September 1999 until October 2000;
Vice President, Corporate
Development, from December 1997 until
September 1999; Vice President,
Mortgage Operations, Block Financial
Corporation, since March 1997; Vice
President, Corporate Counsel and
Secretary, Block Financial
Corporation, from June 1994 until
March 1997.
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Note 1: Mr. Salizzoni served as Chairman of the Board of CompuServe
Corporation from October 1996 until January 1998.
Note 2: Mr. Ernst served as Senior Vice President, Third Party and
International Distribution for American Express Company,
Minneapolis, Minnesota, from July 1997 until June 1998; Senior
Vice President, WorkPlace Financial Services, American Express
Company, from November 1995 until July 1997.
Note 3: Mr. Yabuki served as President and Chief Executive Officer of
American Express Tax & Business Services, Inc., New York, New
York, from 1998 to September 1999; Vice President, Mergers and
Acquisitions, American Express, Minneapolis, Minnesota, from
1996 to 1998; and Regional Vice President, American Express
Tax & Business Services, Inc., Los Angeles, California and
Minneapolis, Minnesota, from 1991 to 1996.
Note 4: Mr. Byers was employed by Foote, Cone and Belding, an
advertising agency in San Francisco, California, from June
1987 until May 1999, most recently serving as the Senior Vice
President and Director of Business Development.
Note 5: Mr. Cotroneo served as the Chief Financial Officer of
MasterCard International, Inc., New York, New York from 1996
to February 2000 and as Regional Financial Officer, MasterCard
International, Inc., Singapore, from 1992 to 1996.
Note 6: Block Financial Corporation acquired Option One Mortgage
Corporation on June 17, 1997, at which time Mr. Dubrish became
an employee of a subsidiary of the Company.
Note 7: Mr. Fitzgerald was General Counsel for OLDE Discount
Corporation from March 1995 through July 7, 2000. The Company
acquired OLDE Discount Corporation in December 1999 and
changed its name to H&R Block Financial Advisors, Inc. on
August 1, 2000.
Note 8: Mr. Rotherham served as a Member of the Office of the
Managing Partner of McGladrey & Pullen LLP from 1997 through
August 1999 and as the Managing Partner of Audit and
Accounting for McGladrey & Pullen LLP from 1995 to 1997. The
Company acquired the non-attest assets of McGladrey & Pullen
LLP on August 1, 1999, at which time Mr. Rotherham became an
employee of a subsidiary of the Company.
Note 9: Mr. Wilson was Senior Vice President of Financial Services
for GMAC Mortgage Corporation, Philadelphia, Pennsylvania,
from September 1998 until October 1998 and Vice President of
International Operations, American Express Financial Advisors,
Minneapolis, Minnesota, from March 1987 until September 1998.
Note 10: Mr. Mertz was Vice President of Treasury for Payless Cashways,
Inc., a full-line building material and finishing products
company, in Lee's Summit,
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Missouri from September 1998 through September 2000. He also
served as Director of Taxes and Risk Management for Payless
Cashways, Inc. from October 1987 until September 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The information called for by this item is contained in part in the
Company's annual report to security holders for the fiscal year ended April 30,
2001, under the heading "Common Stock Data," and is hereby incorporated by
reference. The Company's Common Stock is traded principally on the New York
Stock Exchange. The Company's Common Stock is also traded on the Pacific
Exchange. On June 11, 2001, there were 30,897 shareholders of record of the
Company.
ITEM 6. SELECTED FINANCIAL DATA.
The information called for by this item is contained in the Company's
annual report to security holders for the fiscal year ended April 30, 2001,
under the heading "Selected Financial Data," and is hereby incorporated by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information called for by this item is contained in the Company's
annual report to security holders for the fiscal year ended April 30, 2001,
under the heading "Management's Discussion and Analysis of Results of Operations
and Financial Condition," and is hereby incorporated by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
GENERALLY
In the operations of its subsidiaries and the reporting of its
consolidated financial results, the Company is affected by changes in interest
rates and currency exchange rates. The principal risks of loss arising from
adverse changes in market rates and prices to which the Company and its
subsidiaries are exposed relate to:
- interest rates on cash equivalents, available-for-sale securities,
residual interests in securitizations, mortgage servicing rights
("MSRs"), mortgage loan origination commitments, investments in
mortgage loans held for sale, debt and margin lending activities;
and
- foreign exchange rates, generating translation gains and losses
- trading securities
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Changes in interest rates and/or exchange rates have not, and are not
expected to, materially impact the consolidated financial position, results of
operations or cash flows of the Company.
The Company and its subsidiaries have market risk sensitive instruments
entered into for "non-trading" and "trading" purposes. The Company's
broker-dealers hold marketable securities for trading purposes.
NON-TRADING
Interest rates. The Company's rate-sensitive assets and liabilities are
managed centrally by the office of the Chief Financial Officer of the Company.
The Finance Committee of the Company's Board of Directors approves the Company's
policies and procedures utilized to manage the Company's interest rate risk.
The Company has established investment guidelines to help minimize
market risk exposure of its available-for-sale securities portfolio. These
guidelines focus on managing liquidity, preservation of principal, and earnings,
which are primarily affected by credit quality and movements in LIBOR rates.
Nearly 51% of the Company's cash equivalents ("CE") and
available-for-sale securities ("AFS") are classified as short term, compared to
62% last year. These assets are primarily held for liquidity purposes and are
comprised of highly rated, short-term securities, including qualified money
market funds (taxable and tax-exempt) and securities that reset off of LIBOR
either daily, weekly or monthly. As of April 30, 2001, the portfolio had a
duration of 0.4 years with an average credit quality of AA+ compared to the
portfolio as of April 30, 2000 which had a duration of 0.2 years with an average
credit quality of AAA. With such a short maturity, the portfolio's market value
is relatively insensitive to interest rate charges.
Assuming a 50 basis point decline in interest rates (an approximate 10%
decline) in CE and AFS, consolidated pretax earnings would have declined by
approximately $0.2 million, or about .04%. In fiscal 2000, this change would
have negatively impacted pretax earnings by $2 million, or about one-half of one
percent. The modeled impact of the interest change assumed a 50 basis point
decline across the entire yield curve and assumed that the securities re-priced
at the lower interest rate, yielding lower investment income and no change in
market value due to the portfolio's short duration.
The Company's residual interests in securitizations and MSRs are
subject to prepayment risk, because a mortgage borrower has the option to prepay
a mortgage loan at any time. Prepayment risk tends to increase when interest
rates fall due to the benefits of refinancing. The expected income from these
residual interests and MSRs is sensitive to movements in interest rates due to
this sensitivity to mortgage prepayments.
The Company's residual interests and MSRs were $238.6 million and $61.8
million at April 30, 2001, respectively. They represent 5.8% and 1.5%,
respectively, of total assets. Interest rate risk tends to increase when
interest rates fall due to the benefits of
34
<PAGE> 36
refinancing. Since the future prepayment behavior of the mortgages is uncertain,
the interest rate sensitivity of these residual interests can not be exactly
determined.
Residual interests are recorded based on discounted cash flow models
utilizing prepayment, credit losses and discount rate assumptions. Prepayment
and loss assumptions are based on evaluation of the actual experience of the
Company's servicing portfolio or on market rates on new portfolios, taking into
consideration the current and expected interest rate environment and its
expected impact on future prepayment and default rates. At April 30, 2001, the
sensitivity of the current fair value of the residual interests to a 10% adverse
change in prepayment rates would lower the fair value of the residuals by $24.3
million.
Mortgage servicing rights are recorded based on the present value of
estimated future cash flows related to servicing loans utilizing market discount
rates and anticipated prepayment speeds. The prepayment speeds are estimated
using the Company's historical experience and third party market sources for
fixed-rate mortgages with similar coupons and prepayment reports for comparable
adjustable rate mortgage loans. At April 30, 2001, the sensitivity of the
current fair value of MSRs to a 10% adverse change in prepayment rates would
lower the fair value by $6.9 million.
See "Residual Interests" in the Notes to consolidated financial
statements for further sensitivity analysis of the other assumptions and
detailed explanations of the cash flow models used.
The Company's fixed and variable rate mortgage loans held for sale have
minimal interest rate risk because the mortgage loans are sold in whole loan
sales on the same day the mortgage loans are funded. Therefore, the Company has
minimal investment in mortgage loans held for sale on the balance sheet. The
Company is also exposed to interest rate risk associated with its mortgage loan
origination commitments. These commitments to fund mortgage loans consist of
fixed and variable rate loans that will be sold in the secondary market. The
Company has commitments to fund mortgage loans of $1.5 billion at April 30, 2001
as long as there is no violation of any conditions established in the contracts.
External market forces impact the probability of commitments being exercised,
and therefore, total commitments out standing do not necessarily represent
future cash requirements. The risk with these commitments to fund mortgage loans
is that interest rates might rise between the time the customer locks in the
interest rate on the loan and the time the loan is sold. In some instances, the
Company will utilize forward contracts on FNMA mortgage-backed securities to
reduce the interest rate risk related to its fixed rate origination commitments.
It is the Company's policy to utilize these financial instruments only for the
purpose of offsetting or reducing the risk of loss in earnings associated with a
defined or quantified exposure. They are purchased from certain broker-dealer
counterparties. If the counterparties do not fulfill their obligations, the
Company may be exposed to default risk. As the risk of default depends on the
creditworthiness of the counterparty, the Company's policy requires that such
transactions may be entered into only with counterparties that are rated A or
better (or an equivalent rating) by recognized rating agencies. As a matter of
practice, the Company has limited the counterparties to major banks and
financial institutions meeting such standards. All interest rate contracts
35
<PAGE> 37
conform to the standard International Swaps and Derivatives Association, Inc.
documentation.
Management believes the Company is not significantly exposed to
interest rate risk related to its mortgage loans held for sale because they are
generally short-term in nature, the portfolios are carried at the lower of cost
or market and they are funded with short-term, variable rate debt. As a result,
any change in interest rates would not materially impact the Company's
consolidated pretax earnings. Likewise, the Company is not materially exposed to
any additional risks related to the variable rate portfolio such as differences
in interest rate indices used to re-price these assets and liabilities as a
result of differences in timing or re-pricing characteristics.
The Company issues long-term debt related to certain acquisitions. When
Senior notes will be issued, the Company may choose to hedge its interest rate
risk related to the anticipated issuance of fixed rate term debt by utilizing
treasury rate guarantees. The risk is that interest rates might rise between the
time the Company is anticipating to issue the debt and the bond issuance date.
At April 30, 2001, there were no hedges outstanding related to long-term debt.
The Company's long-term debt at April 30, 2001 consists primarily of fixed-rate
Senior notes; therefore, a change in interest rates would have no impact on
consolidated pretax earnings.
The Company's broker-dealers hold interest bearing receivables from
customers, brokers, dealers and clearing organizations which consist primarily
of amounts due on margin and cash transactions and are generally short-term in
nature. The Company funds these short-term assets with short-term variable rate
liabilities from customers, brokers and dealers. Although there may be
differences in the timing of the re-pricing related to these assets and
liabilities, the Company believes it is not significantly exposed to interest
rate risk in this area. As a result, any change in interest rate would not
materially impact the Company's consolidated pretax earnings.
Foreign Exchange Rates. The operation of the Company's subsidiaries in
international markets provides exposure to volatile movements in currency
exchange rates. The currencies involved are the Canadian dollar, the Australian
dollar and the British pound. International tax operations constituted
approximately 1.6% of the Company's fiscal year 2001 consolidated pretax
earnings, compared to 1.2% in fiscal 2000. As currency exchange rates change,
translation of the financial results of International tax operations into U.S.
dollars does not presently materially affect, and has not historically
materially affected, the consolidated financial results of the Company, although
such changes do affect the year-to-year comparability of the operating results
of the international businesses.
The Company does not hedge translation risks because (1) cash flows
from international operations are generally reinvested locally and (2) the
minimal exposure to material volatility to reported earnings does not justify
the cost.
The Company translates revenues and expenses related to its
international operations at the average of exchange rates in effect during the
period. The sensitivity analysis of fluctuation in foreign currency exchange
rates compares the U.S. dollar
36
<PAGE> 38
variance in using the actual exchange rates and using rates that have been
adversely adjusted by 10%. The Company estimates that a 10% change in foreign
exchange rates by itself would impact reported pretax earnings from continuing
operations by approximately $672,000. Such impact represents approximately 8.8%
of the pretax earnings of International tax operations for fiscal year 2001 and
approximately .14% of the Company's pretax earnings for such year. In fiscal
2000, a 10% change in exchange rates would have impacted fiscal 2000 pretax
earnings by approximately $425,000 or 9% of International tax operations pretax
earnings and .10% of the Company's pretax earnings.
TRADING
The Company's trading portfolio is effected by changes in market
rates/prices. The risk is the loss of earnings arising from adverse changes in
the value of the trading portfolio. The Company's broker-dealer holds the
trading portfolio at quoted market prices and such represents 1.1% of the
Company's total assets. The market value of the Company's trading portfolio at
April 30, 2001 was approximately $46.2 million. The impact of a 10% change in
the market value of these investments would be approximately $4.6 million, or
about 1.0% of consolidated pretax earnings. The Company manages its market
price risk exposure in its equity-trading portfolio by taking positions only in
those securities in which the broker-dealer makes a market and by minimizing
its overnight positions to as close to zero as possible. With respect to its
fixed-income securities, the Company manages its market price risk exposure by
limiting concentration risk, maintaining minimum credit quality and limiting
inventory to recent trading volumes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information called for by this item and listed at Item 14(a) 1 is
contained in the Company's annual report to security holders for the fiscal year
ended April 30, 2001, and is hereby incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There has been no change in the registrant's accountants during the two
most recent fiscal years or any subsequent interim time period.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information called for by this item with respect to directors of
the Company and with respect to compliance with Section 16(a) of the Securities
Exchange Act is included under the captions "Election of Directors" and "Section
16(a) Beneficial Ownership Reporting Compliance," respectively, in the
Company's definitive proxy statement filed pursuant to Regulation 14A not later
than 120 days after April 30, 2001, and in Item 4a "Executive Officers of the
Registrant" in this report, and is incorporated herein by reference.
37
<PAGE> 39
ITEM 11. EXECUTIVE COMPENSATION.
The information called for by this item is contained in the Company`s
definitive proxy statement filed pursuant to Regulation 14A not later than 120
days after April 30, 2001, in the sections entitled "Directors' Meetings,
Compensation and Committees" and "Compensation of Executive Officers," and is
incorporated herein by reference, except that information contained in the
section entitled "Compensation of Executive Officers" under the subtitles
"Performance Graph" and "Compensation Committee Report on Executive
Compensation" is not incorporated herein by reference and is not to be deemed
"filed" as part of this filing.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information called for by this item is contained in the Company`s
definitive proxy statement filed pursuant to Regulation 14A not later than 120
days after April 30, 2001, in the section titled "Election of Directors" and in
the section titled "Information Regarding Security Holders," and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by this item is contained in the Company`s
definitive proxy statement filed pursuant to Regulation 14A not later than 120
days after April 30, 2001, in the section titled "Election of Directors," and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The following consolidated financial statements of
H&R Block, Inc., and subsidiaries are incorporated by
reference from the Company`s annual report to
security holders for the fiscal year ended April 30,
2001:
Page
----
Consolidated Statements of Earnings 34
Consolidated Balance Sheets 35
Consolidated Statements of Cash Flows 36
Consolidated Statements of Stockholders' Equity 37
Notes to Consolidated Financial Statements 38
Quarterly Financial Data 54
Report of Independent Accountants 63
2. Financial Statement Schedules
Report of PricewaterhouseCoopers LLP, Certified Public
Accountants on Financial Statement Schedule for H&R
Block, Inc.
38
<PAGE> 40
Schedule II - Valuation and Qualifying Accounts
Schedules not filed herewith are either not applicable,
the information is not material or the information is
set forth in the financial statements or notes thereto.
3. Exhibits
3.1 Restated Articles of Incorporation of H&R Block, Inc.,
as amended, filed as Exhibit 3(b) to the Company`s
quarterly report on Form 10-Q for the quarter ended
October 31, 1996, are incorporated herein by reference.
3.2 Amended and Restated Bylaws of H&R Block, Inc., as
amended, filed as Exhibit 3.1 to the Company`s
quarterly report on Form 10-Q for the quarter ended
October 31, 1999, are incorporated herein by reference.
4.1 Indenture dated as of October 20, 1997, among H&R
Block, Inc., Block Financial Corporation and Bankers
Trust Company, as Trustee, filed as Exhibit 4(a) to the
Company's quarterly report on Form 10-Q for the quarter
ended October 31, 1997, is incorporated herein by
reference.
4.2 First Supplemental Indenture, dated as of April 18,
2000, among H&R Block, Inc., Block Financial
Corporation, Bankers Trust Company and the Bank of New
York, filed as Exhibit 4(a) to the Company's current
report on Form 8-K dated April 13, 2000, is
incorporated herein by reference.
4.3 Form of 6 3/4% Senior Note due 2004 of Block Financial
Corporation, filed on October 23, 1997 as Exhibit 2.2
to the Company's current report on Form 8-K, is
incorporated herein by reference.
4.4 Form of 8.50% Senior Note due 2007 of Block Financial
Corporation, filed as Exhibit 4(b) to the Company's
current report on Form 8-K dated April 13, 2000, is
incorporated herein by reference.
4.5 Copy of Rights Agreement dated March 25, 1998 between
H&R Block, Inc. and ChaseMellon Shareholder Services,
L.L.C., filed on July 22, 1998 as Exhibit 1 to the
Company's Registration Statement on Form 8-A, is
incorporated herein by reference.
4.6 Form of Certificate of Designation, Preferences and
Rights of Participating Preferred Stock of H&R Block,
Inc., filed as Exhibit 4(e) to the Company's annual
report on Form 10-K for the fiscal year ended April 30,
1995, is incorporated by reference.
39
<PAGE> 41
4.7 Form of Certificate of Amendment of Certificate of
Designation, Preferences and Rights of Participating
Preferred Stock of H&R Block, Inc., filed as Exhibit
4(j) to the Company's annual report on Form 10-K for
the fiscal year ended April 30, 1998 is incorporated by
reference.
4.8 Form of Certificate of Designation, Preferences and
Rights of Delayed Convertible Preferred Stock of H&R
Block, Inc., filed as Exhibit 4(f) to the Company's
annual report on Form 10-K for the fiscal year ended
April 30, 1995, is incorporated by reference.
10.1 The Company's 1993 Long-Term Executive Compensation
Plan, as amended through September 8, 1999, filed as
Exhibit 10.2 to the Company's quarterly report on Form
10-Q for the quarter ended October 31, 1999, is
incorporated herein by reference.
10.2 The H&R Block Deferred Compensation Plan for Directors,
as amended through March 9, 1994, filed as Exhibit 10.2
to the Company's annual report on Form 10-K for the
fiscal year ended April 30, 2000, is incorporated by
reference.
10.3 Amendment No. 2 to H&R Block Deferred Compensation Plan
for Directors, filed as Exhibit 10(c) to the Company's
quarterly report on Form 10-Q for the quarter ended
January 31, 1997, is incorporated herein by reference.
10.4 Amendment No. 3 to H&R Block Deferred Compensation Plan
for Directors, filed as Exhibit 10(c) to the Company's
quarterly report on Form 10-Q for the quarter ended
July 31, 1997, is incorporated herein by reference.
10.5 Amendment No. 4 to H&R Block Deferred Compensation Plan
for Directors, filed as Exhibit 10(d) to the Company's
quarterly report on Form 10-Q for the quarter ended
July 31, 1997, is incorporated herein by reference.
10.6 Amendment No. 5 to H&R Block Deferred Compensation Plan
for Directors, filed as Exhibit 10(c) to the Company's
quarterly report on Form 10-Q for the quarter ended
January 31, 1998, is incorporated herein by reference.
10.7 Amendment No. 6 to H&R Block Deferred Compensation Plan
for Directors, filed as Exhibit 10.2 to the Company's
quarterly report on Form 10-Q for the quarter ended
January 31, 2000, is incorporated by reference.
10.8 Amendment No. 7 to H&R Block Deferred Compensation Plan
for Directors, filed as Exhibit 10.2 to the Company's
quarterly report on
40
<PAGE> 42
Form 10-Q for the quarter ended
January 31, 2001, is incorporated by reference.
10.9 The H&R Block Deferred Compensation Plan for
Executives, as Amended and Restated, filed as Exhibit
10.1 to the Company's quarterly report on Form 10-Q for
the quarter ended January 31, 1999, is incorporated
herein by reference.
10.10 Amendment No. 1 to the H&R Block Deferred Compensation
Plan for Executives, as Amended and Restated, filed as
Exhibit 10.2 to the Company's quarterly report on Form
10-Q for the quarter ended January 31, 1999, is
incorporated herein by reference.
10.11 Amendment No. 2 to the H&R Block Deferred Compensation
Plan for Executives, as Amended and Restated, filed as
Exhibit 10.4 to the Company's quarterly report on Form
10-Q for the quarter ended October 31, 1999, is
incorporated herein by reference.
10.12 Amendment No. 3 to the H&R Block Deferred Compensation
Plan for Executives, as Amended and Restated, filed as
Exhibit 10.5 to the Company's quarterly report on Form
10-Q for the quarter ended October 31, 1999, is
incorporated herein by reference.
10.13 Amendment No. 4 to the H&R Block Deferred Compensation
Plan for Executives, as Amended and Restated, filed as
Exhibit 10.1 to the Company's quarterly report on Form
10-Q for the quarter ended January 31, 2000, is
incorporated herein by reference.
10.14 Amendment No. 5 to the H&R Block Deferred Compensation
Plan for Executives, as Amended and Restated, filed as
Exhibit 10.3 to the Company's quarterly report on Form
10-Q for the quarter ended October 31, 2000, is
incorporated herein by reference.
10.15 The H&R Block Short-Term Incentive Plan, filed as
Exhibit 10.1 to the Company's quarterly report on Form
10-Q for the quarter ended October 31, 2000, is
incorporated herein by reference.
10.16 The Company's 1989 Stock Option Plan for Outside
Directors, as amended, filed as Exhibit 10.1 to the
Company's quarterly report on Form 10-Q for the quarter
ended October 31, 1998, is incorporated herein by
reference.
10.17 The H&R Block Stock Plan for Non-Employee Directors,
filed as Exhibit 10(e) to the Company's quarterly
report on Form 10-Q for the quarter ended October 31,
1997, is incorporated herein by reference.
41
<PAGE> 43
10.18 The H&R Block, Inc. 2000 Employee Stock Purchase Plan,
filed as Appendix B to the Company's Schedule 14a on
July 30, 2000, is incorporated herein by reference.
10.19 The H&R Block, Inc. Executive Survivor Plan (as Amended
and Restated) filed as Exhibit 10.4 to the Company's
quarterly report on Form 10-Q for the quarter ended
October 31, 2000, is incorporated herein by reference.
10.20 Employment Agreement dated October 11, 1996, between
the Company and Frank L. Salizzoni, filed as Exhibit
10(b) to the Company's quarterly report on Form 10-Q
for the quarter ended October 31, 1996, is incorporated
herein by reference.
10.21 Employment Agreement dated July 16, 1998, between the
Company and Mark A. Ernst, filed as Exhibit 10(a) to
the Company's quarterly report on Form 10-Q for the
quarter ended July 31, 1998, is incorporated herein by
reference.
10.22 Amendment to Employment Agreement dated June 30, 2000,
between HRB Management, Inc. and Mark A. Ernst, filed
as Exhibit 10.1 to the Company's quarterly report on
Form 10-Q for the quarter ended July 31, 2000, is
incorporated herein by reference.
10.23 Employment Agreement dated January 20, 1998, between
H&R Block Tax Services, Inc, and Thomas L. Zimmerman,
filed as Exhibit 10.3 to the Company's quarterly report
on Form 10-Q for the quarter ended January 31, 2000, is
incorporated herein by reference.
10.24 Employment Agreement dated September 7, 1999, between
HRB Management, Inc. and Jeffery Yabuki, filed as
Exhibit 10.4 to the Company's quarterly report on Form
10-Q for the quarter ended January 31, 2000, is
incorporated herein by reference.
10.25 Employment Agreement dated January 26, 2000, between
HRB Management, Inc. and Frank J. Cotroneo, filed as
Exhibit 10.5 to the Company's quarterly report on Form
10-Q for the quarter ended January 31, 2000, is
incorporated herein by reference.
10.26 Senior Managing Director Agreement dated August 2,
1999, between RSM McGladrey, Inc. and Thomas G.
Rotherham, filed as Exhibit 10.23 to the Company's
annual report on Form 10-K for the fiscal year ended
April 30, 2001, is incorporated herein by reference.
12 Computation of Ratio of Earnings to Fixed Charges for
the five years ended April 30, 2001.
42
<PAGE> 44
13 That portion of the annual report to security holders
for the fiscal year ended April 30, 2001 which is
expressly incorporated by reference in this filing.
Portions of such annual report to security holders not
expressly incorporated by this reference in this filing
are not deemed "filed" with the Commission.
21 Subsidiaries of the Company.
23 Consent of PricewaterhouseCoopers LLP, Certified Public
Accountants.
(b) Reports on Form 8-K. The Company did not file any reports on
Form 8-K during the fourth quarter of the year ended April
30, 2001.
43
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
H&R BLOCK, INC.
June 20, 2001 By /s/ Mark A. Ernst
-------------------------------------
Mark A. Ernst
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title
/s/ Mark A. Ernst President, Chief Executive Officer and
------------------------------- Director (principal executive officer)
Mark A. Ernst
/s/ G. Kenneth Baum Director
-------------------------------
G. Kenneth Baum
/s/ Thomas M. Bloch Director
-------------------------------
Thomas M. Bloch
Director
-------------------------------
Robert E. Davis
/s/ Donna R. Ecton Director
-------------------------------
Donna R. Ecton
/s/ Henry F. Frigon Director
-------------------------------
Henry F. Frigon
/s/ Roger W. Hale Director
-------------------------------
Roger W. Hale
/s/ Frank L. Salizzoni Director
-------------------------------
Frank L. Salizzoni
/s/ Louis W. Smith Director
-------------------------------
Louis W. Smith
/s/ Rayford Wilkins, Jr. Director
-------------------------------
Rayford Wilkins, Jr.
(Signed as to each on June 20, 2001)
44
<PAGE> 46
/s/ Frank J. Cotroneo Senior Vice President and Chief Financial
------------------------------- Officer (principal financial officer)
Frank J. Cotroneo
/s/ Cheryl L. Givens Vice President and Corporate Controller
------------------------------- (principal accounting officer)
Cheryl L. Givens
(Signed as to each on June 20, 2001)
45
<PAGE> 47
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
H&R Block, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated June 19, 2001 appearing in the 2001 Annual Report to Shareholders of H&R
Block, Inc. (which report and consolidated financial statements are incorporated
by reference in this Annual Report on Form 10-K) also included an audit of the
financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PricewaterhouseCoopers LLP
Kansas City, Missouri
June 19, 2001
46
<PAGE> 48
H&R BLOCK, INC.
AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED APRIL 30, 2001, 2000 AND 1999
<TABLE>
<CAPTION>
Additions
---------------------------------
Balance Charged to Balance
Beginning Costs and Charged At End
Description Of Period Expenses To Other Deductions Of Period
-------------------------- ---------------- --------------- ------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Allowance for
Doubtful Accounts -
deducted from
accounts receivable in
the balance sheet
2001 $50,361,000 $84,422,000 -- $85,966,000 $48,817,000
================ =============== ============= ================ ==================
2000 $61,872,000 $51,719,000 -- $63,230,000 $50,361,000
================ =============== ============= =============== ==================
1999 $45,314,000 $71,662,000 -- $55,104,000 $61,872,000
================ =============== ============= ================ ==================
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>3
<FILENAME>c63912ex12.txt
<DESCRIPTION>COMPUTATION TO RATIO OF EARNINGS TO FIXED CHARGES
<TEXT>
<PAGE> 1
EXHIBIT 12
H&R BLOCK, INC.
COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Pretax income from continuing operations (a) $473,078 $412,266 $383,541 $296,433 $232,083
======== ======== ======== ======== ========
FIXED CHARGES:
Interest expense 242,551 155,027 69,338 38,899 608
Interest portion of net rent expense (b) 52,108 45,274 33,218 28,248 25,998
-------- -------- -------- -------- --------
Total fixed charges 294,659 200,301 102,556 67,147 26,606
-------- -------- -------- -------- --------
Earnings before income taxes and fixed charges $767,737 $612,567 $486,097 $363,580 $258,689
======== ======== ======== ======== ========
Ratio of earnings to fixed charges (c) 2.6 3.1 4.7 5.4 9.7
======== ======== ======== ======== ========
</TABLE>
(a) Pretax income from continuing operations is shown with CompuServe
Corporation and the Credit Card Segment as Discontinued Operations for
all years presented.
(b) One-third of net rent expense is the portion deemed representative of
the interest factor.
(c) The decrease in the ratio of earnings to fixed charges in 1998 is
primarily attributable to the acquisition of Option One Mortgage
Corporation on June 17, 1997. Without the interest expense incurred on
the long-term debt issued to acquire Option One and the interest
expense on mortgage loan borrowings the ratio of earnings to fixed
charges would have been 10.0.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>4
<FILENAME>c63912ex13.txt
<DESCRIPTION>PORTION OF ANNUAL REPORT
<TEXT>
<PAGE> 1
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
OVERVIEW OF REPORTABLE OPERATING SEGMENTS
The principal business activity of the Company's operating subsidiaries is
providing tax and financial services to the general public. The Company operates
in the following reportable segments:
U.S. tax operations: This segment primarily consists of the Company's
traditional tax business - which served 16.9 million taxpayers in fiscal year
2001, more than any other company. This segment is primarily engaged in
providing tax return preparation, filing, and related services in the United
States. Tax-related service revenues include fees from company-owned tax offices
and royalties from franchised offices. This segment also participates in the
refund anticipation loan products offered by a third-party lending institution
to tax clients. This segment includes the Company's tax preparation software -
Kiplinger TaxCut(R) from H&R Block, other personal productivity software,
online tax preparation through a tax preparer (whereby the client fills out an
online tax organizer and sends it to a tax preparer for preparation), online
do-it-yourself-tax preparation, online professional tax review and online tax
advice through the hrblock.com website.
International tax operations: This segment is primarily engaged in
providing local tax return preparation, filing and related services in Canada,
Australia and the United Kingdom. In addition, there are franchise offices in 9
countries that prepare U.S. tax returns for U.S. citizens living abroad. This
segment served 2.3 million taxpayers in fiscal 2001. Tax-related service
revenues include fees from company-owned tax offices and royalties from
franchised offices.
Mortgage operations: This segment is primarily engaged in the origination,
servicing, and sale of nonconforming and conforming mortgage loans. This segment
mainly offers, through a network of mortgage brokers, a flexible product line to
borrowers who are creditworthy but do not meet traditional underwriting
criteria. Conforming mortgage loan products, as well as the same flexible
product line available through brokers, are offered through H&R Block Financial
Centers and H&R Block Mortgage Corporation retail offices.
Investment services: This segment is primarily engaged in offering full
service investment advice through H&R Block Financial Advisors, Inc., a
full-service discount securities broker. Financial planning and investment
advice are offered through H&R Block Financial Centers, H&R Block Financial
Advisors offices and tax offices, and stocks, bonds, mutual funds and other
products and securities are offered through a nationwide network of registered
representatives, at the same locations.
Business services: This segment is primarily engaged in providing
accounting, tax and consulting services to business clients and tax, estate
planning, financial planning, wealth management and insurance services to
individuals.
RESULTS OF OPERATIONS
NEW ACCOUNTING STANDARDS
In the fourth quarter of fiscal 2001, the Company elected the early adoption of
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended in June 2000 ("SFAS 133") and
Statement of Financial Accounting Standards No. 138, "Accounting for Derivative
Instruments and Certain Hedging Activities, an amendment of FASB Statement No.
133" ("SFAS 138"). SFAS 133 and 138 establish accounting and reporting standards
for derivative and hedging activities, and requires companies to record
derivative instruments as assets or liabilities, measured at fair value. The
Company has identified derivative instruments related to certain of its
commitments to originate residential mortgage loans.
The Company originates residential mortgage loans with the intention of
selling these loans. These commitments to fund loans are freestanding derivative
instruments and do not qualify for hedge accounting treatment and, therefore,
the fair value adjustments are recorded in the consolidated statement of
earnings. The commitments that qualify as derivative instruments totaled $252.6
million. The transition adjustment for adoption of SFAS 133 and SFAS 138 of $4.4
million, net of taxes, is shown as the cumulative effect of a change in
accounting principle in the consolidated statement of earnings for the year
ended April 30, 2001.
Currently, there are ongoing discussions surrounding the implementation of
SFAS 133 by the Financial Accounting Standards Board's Derivative Implementation
Group. If the definition of derivative instruments is altered, this change may
impact the Company's transition amounts and subsequent reported operating
results.
In December 1999, the Securities and Exchange Commission ("SEC") issued SEC
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to
ONE TO ONE | H&R BLOCK | 2001 21
<PAGE> 2
revenue recognition in financial statements. The Company implemented SAB 101 in
the fourth quarter of fiscal 2001. The implementation of SAB 101 had no impact
on annual revenues and earnings, however, due to the seasonal influences of the
business, the implementation resulted in a shift of revenues and earnings
between the Company's third and fourth quarters. As a result, the Company has
adjusted its third quarter of fiscal year 2001 to lower revenues and net
earnings to $656.0 million and $4.5 million, respectively, included in Quarterly
Financial Data in the notes to consolidated financial statements.
In fiscal year 2001, the Company adopted Statement of Financial Accounting
Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS 140"). SFAS 140 is a replacement of
Statement of Financial Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125").
SFAS 140 revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain new
disclosures, but carries over most of the SFAS 125 provisions without
reconsideration. The adoption of SFAS 140 had no effect on the consolidated
financial statements.
In July 2000, the Emerging Issues Task Force reached a consensus on Issue
99-20, "Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets ("EITF 99-20"). EITF 99-20
addresses how the holder of beneficial interests should recognize cash flows on
the date of the transaction and how interest income is recognized over the life
of the interests. EITF 99-20 will be effective for the Company in the first
quarter of fiscal year 2002. The Company has not yet determined the effect of
EITF 99-20 on the consolidated financial statements.
All amounts in the following tables are in thousands.
FISCAL 2001 COMPARED TO FISCAL 2000
<Table>
<CAPTION>
Year Ended Variance
CONSOLIDATED H&R BLOCK, INC. April 30 Better (worse) than
--------------------------------------------------------------------------------
2001 2000 $ %
----------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 3,001,575 $ 2,451,943 $ 549,632 22.4%
----------------------------------------------------
Pretax earnings 473,078 412,266 60,812 14.8%
Net earnings $ 281,162 $ 251,895 $ 29,267 11.6%
----------------------------====================================================
</Table>
Consolidated revenues for the year increased 22.4% to $3.0 billion compared
to $2.5 billion in the prior year due primarily to U.S. tax operations, Mortgage
operations and Investment services. The increase related to Investments services
is due to the inclusion of a full twelve months of operations in fiscal 2001
compared to only five months in fiscal 2000.
Pretax earnings of $473.1 million increased 14.8% compared to last year due
to better performance within U.S. tax operations and Mortgage operations, which
were partially offset by lesser performance within Investment services and
higher interest expense on acquisition debt.
Net earnings increased 11.6% to $281.2 million, or $3.04 per diluted share,
from $251.9 million, or $2.55 per diluted share in fiscal 2000. The Company's
fiscal 2001 results include two one-time items -- the implementation of SFAS
133, an additional $.05 per diluted share, and an accrual for settlement of
litigation brought against the Company, a reduction of $.11 per diluted share.
Excluding the effects of these one-time items, diluted earnings per share was
$3.10, a 21.6% increase over fiscal 2000.
The effective tax rate increased from 38.9% to 41.5% this year as a result
of a full year of non-deductible intangible asset and goodwill amortization
resulting from the acquisition of OLDE Financial Corporation ("OLDE"), compared
with five months of amortization last year.
The Company's performance as measured by earnings before interest
(including interest expense on acquisition debt, investment income and interest
allocated to operating business units), taxes, depreciation and amortization
("EBITDA") improved $189.2 million to $787.2 million compared to $598.0 million
in the prior year. EBITDA is utilized by management to evaluate the performance
of its operating segments because many of its segments reflect substantial
amortization of acquired intangible assets and goodwill resulting from recent
acquisitions. Management believes EBITDA is a good measure of cash flow
generation because the Company has not historically been capital intensive and
it also removes the effects of purchase accounting. The calculation may not be
comparable to the calculation of EBITDA by other companies.
In addition, the Company continues to measure its performance based on the
calculation of earnings excluding the after-tax impact of amortization of
acquired intangible assets and goodwill. The pretax amortization expense of
acquired intangible assets and goodwill increased 57.2% in fiscal 2001 to $104.3
million from $66.3 million in fiscal 2000. Net earnings from continuing
operations before change in accounting
22 ONE TO ONE | H&R BLOCK | 2001
<PAGE> 3
principle, excluding the after-tax impact of this expense, was $362.2 million,
or $3.91 per diluted share in 2001, compared to $304.4 million, or $3.08 per
diluted share in the prior year, increases of 19.0% and 26.9%, respectively.
An analysis of operations by reportable operating segment follows.
<Table>
<Caption>
Year Ended Variance
U.S. TAX OPERATIONS April 30 Better (worse) than
----------------------------------------------------------------------------------------------
2001 2000 $ %
----------------------------------------------------------
<S> <C> <C> <C> <C>
Tax preparation and related fees $ 1,254,494 $ 1,128,891 $ 125,603 11.1%
Royalties 141,258 128,870 12,388 9.6%
RAL participation fees 133,710 89,761 43,949 49.0%
Software sales 58,676 39,546 19,130 48.4%
Other 65,985 44,017 21,968 49.9%
----------------------------------------------------------
Total revenues 1,654,123 1,431,085 223,038 15.6%
==========================================================
Compensation & benefits 612,538 550,287 (62,251) -11.3%
Occupancy & equipment 187,328 180,110 (7,218) -4.0%
Depreciation & amortization 70,383 66,522 (3,861) -5.8%
Cost of software sales 34,286 22,430 (11,856) -52.9%
Bad debt expense 55,394 32,541 (22,853) -70.2%
Marketing & advertising 92,012 96,922 4,910 5.1%
Other 168,668 162,281 (6,387) -3.9%
----------------------------------------------------------
Total expenses 1,220,609 1,111,093 (109,516) -9.9%
----------------------------------------------------------
Pretax earnings $ 433,514 $ 319,992 $ 113,522 35.5%
------------------------------------==========================================================
</Table>
Revenues increased 15.6% to $1.7 billion for the year ended April 30, 2001.
The increase is primarily attributable to higher tax preparation and related
fees that are primarily the result of increases in the average fees per client.
The increase in the average fees per client in tax offices is due to a planned
price increase, a shift in our customer mix to those with more complex returns
and the reduction of price discounting at the point of sale. The average fee per
client served increased 11.4% to $118.17. The number of clients served in
company-owned operations increased 3.8% to 11.7 million due almost entirely to
e-commerce clients. In addition, the number of tax returns filed electronically
increased 8.7% in company- owned operations, resulting in the electronic filing
of 84.4% of all returns processed in company-owned operations. Revenues from
participations in Refund Anticipation Loans ("RALs") increased $43.9 million
over the prior year. This increase is a result of both increases in the average
revenue per RAL of 43.9% and the number of RALs of 2.7%. The Company
participates with Household Tax Masters in offering RALs to customers through
tax offices (49.9% in company-owned offices and 25% in major franchise offices).
Revenue from participation interests is calculated as our percentage
participation times the fee that the customer pays for the RAL. The fee that the
customer pays for the RAL is set by Household Tax Masters and is based on the
dollar amount of the RAL. The increase in pricing is due to adjustments made to
offset the increased risk of bad debt resulting from the IRS's heightened review
of returns containing earned income tax credits. Also contributing to the
increase in revenues were software sales, which increased 48.4% due mainly to a
change in our pricing strategy that lowered our retail price per federal unit,
but included an additional fee for state products. In addition, royalties
increased 9.6% to $141.3 million due to pricing increases and a .2% increase in
clients served by franchises.
Pretax earnings increased 35.5% to $433.5 million compared to $320.0
million last year. The increase is largely due to the increase in revenues as
well as effective expense control. As a result of expense control, the segment's
operating margin improved to 26.2% compared to 22.4% in the prior year. EBITDA
increased 31.2% to $507.1 million in fiscal 2001.
ONE TO ONE | H&R BLOCK | 2001 23
<PAGE> 4
<Table>
<CAPTION>
Year Ended Variance
INTERNATIONAL TAX OPERATIONS April 30 Better (worse) than
--------------------------------------------------------------------------------
2001 2000 $ %
----------------------------------------------
<S> <C> <C> <C> <C>
Canada $ 57,174 $ 61,102 $ (3,928) -6.4%
Australia 17,939 17,573 366 2.1%
United Kingdom 1,763 1,595 168 10.5%
Overseas franchises 2,692 1,248 1,444 115.7%
----------------------------------------------
Total revenues 79,568 81,518 (1,950) -2.4%
==============================================
Canada 4,962 3,291 1,671 50.8%
Australia 3,472 3,189 283 8.9%
United Kingdom (1,602) (1,958) 356 18.2%
Overseas franchises 846 347 499 143.8%
----------------------------------------------
Pretax earnings $ 7,678 $ 4,869 $ 2,809 57.7%
----------------------------------==============================================
</Table>
International revenues decreased by 2.4% to $79.6 million from $81.5
million last year. The decrease was driven primarily by unfavorable changes in
currency exchange rates and management's decision to reduce the non-profitable
early discounted return business in Canada.
Pretax earnings increased 57.7% to $7.7 million from $4.9 million last year
in spite of the unfavorable changes in currency exchange rates. The improved
performance in Canada is primarily attributable to business management and
effective cost control mainly in marketing, labor and supplies.
The Australian results were negatively affected by the unfavorable change
in the currency exchange rates as the pretax results improved by 26.6% in
Australian currency. These results were driven primarily by a 6.7% increase in
the number of returns processed.
The United Kingdom pretax loss decreased by 18.2% primarily reflecting
ongoing efforts to close non-profitable offices while increasing business
volume.
The Overseas franchises improvement of 143.8% is attributable to a 51%
increase in return volume, primarily in Puerto Rico, as a child tax credit
program was introduced this year.
International tax operations' EBITDA improved 22.4% to $12.7 million in
fiscal year 2001.
<Table>
<CAPTION>
Year Ended Variance
MORTGAGE OPERATIONS April 30 Better (worse) than
--------------------------------------------------------------------------------
2001 2000 $ %
----------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 47,715 $ 92,155 $(44,440) -48.2%
Loan servicing income 110,222 62,510 47,712 76.3%
Gain on sale of mortgage loans 256,304 199,608 56,696 28.4%
Other 1,561 1,156 405 35.0%
----------------------------------------------
Total revenues 415,802 355,429 60,373 17.0%
==============================================
Compensation & benefits 128,887 103,049 (25,838) -25.1%
Variable servicing & processing 34,620 20,338 (14,282) -70.2%
Occupancy & equipment 23,690 15,462 (8,228) -53.2%
Interest expense 13,729 56,988 43,259 75.9%
Bad debt expense 16,153 8,808 (7,345) -83.4%
Amortization of acquisition
intangibles 13,577 13,760 183 1.3%
Other 46,110 48,450 2,340 4.8%
----------------------------------------------
Total expenses 276,766 266,855 (9,911) -3.7%
----------------------------------------------
Pretax earnings $ 139,036 $ 88,574 $ 50,462 57.0%
----------------------------------==============================================
</Table>
24 ONE TO ONE | H&R BLOCK | 2001
<PAGE> 5
Revenues increased 17.0% to $415.8 million in fiscal 2001 compared with
fiscal 2000. The increase is primarily due to an increase in production volume,
a favorable secondary market environment and a larger servicing portfolio, which
was partially offset by lower interest income. Revenues related to the sale of
mortgage loans increased $56.7 million over the prior year resulting from
favorable secondary market pricing on mortgage loan sales. During the twelve
months ending April 30, 2001 the Company originated $6.5 billion in mortgage
loans compared to $5.7 billion last year. The total execution price representing
gain on sale of mortgage loans for the fiscal year ended April 30, 2001 was
3.71% compared to 3.73% for the fiscal year ended April 30, 2000. Servicing
revenues increased 76.3% over the prior year. The increase is principally
attributable to a higher loan servicing portfolio balance, increased servicing
operations efficiencies and an increase in the collection of borrower late fees.
The average number of loans being serviced increased by 67,112 to an average
portfolio balance for the year of $15.9 billion compared to $8.8 billion last
year. The increase in revenues was partially offset by the winding down of
certain mortgage activities during fiscal year 2001.
Pretax earnings increased $50.5 million or 57.0% to $139.0 million for the
year ended April 30, 2001. The improved performance is primarily due to the
increased revenues. The decrease in both interest income and interest expense is
a result of the move to off-balance sheet arrangements for the funding of
mortgage loans. Utilizing the off-balance sheet arrangements, the Company
essentially no longer incurs short-term borrowings to fund its mortgage loans.
Mortgage operations' operating margin increased to 33.4% from 24.9% in the prior
year. The move to off-balance sheet arrangements accounted for 520 basis points
of the margin improvement.
Mortgage operations benefited from cross-sell initiatives in 2001, as 5.4%
of all mortgage loans originated came from tax clients. EBITDA for Mortgage
operations increased 48.6% to $161.8 million compared to $108.9 million last
year.
<Table>
<CAPTION>
Year Ended Variance
INVESTMENT SERVICES April 30 Better (worse) than
--------------------------------------------------------------------------------
2001 2000 $ %
-------------------------------------------
<S> <C> <C> <C> <C>
Commission & fee income $ 241,494 $ 177,370 $ 64,124 36.2%
Margin interest income 201,793 79,416 122,377 154.1%
Other 29,138 11,590 17,548 151.4%
-------------------------------------------
Total revenues 472,425 268,376 204,049 76.0%
===========================================
Compensation & benefits 161,560 87,590 (73,970) -84.5%
Interest expense 106,303 41,563 (64,740) -155.8%
Occupancy & equipment 30,048 12,551 (17,497) -139.4%
Depreciation & amortization 19,166 6,058 (13,108) -216.4%
Commission, floor brokerage & fees 10,103 15,553 5,450 35.0%
Amortization of acquisition
intangibles 47,531 19,605 (27,926) -142.4%
Other 85,025 44,230 (40,795) -92.2%
-------------------------------------------
Total expenses 459,736 227,150 (232,586) -102.4%
-------------------------------------------
Pretax earnings $ 12,689 $ 41,226 $ (28,537) -69.2%
-------------------------------------===========================================
</Table>
Investment services revenues for the year increased 76.0% to $472.4 million
from $268.4 million. The increase is attributable primarily to the acquisition
of OLDE, the parent company of H&R Block Financial Advisors, Inc. ("HRBFA,"
formerly OLDE Discount Corporation) on December 1, 1999, and reflects a full
twelve months of revenues for the acquired companies in fiscal year 2001 as
compared with only five months of revenues in fiscal year 2000.
Pretax earnings for this segment decreased by 69.2% to $12.7 million from
$41.2 million earned last year. The decrease in pretax earnings is primarily
attributable to lower trading volume, an increase in the amortization of
acquired intangible assets and a litigation settlement. In the former case,
there were twelve months of acquired intangible asset amortization in fiscal
year 2001, whereas in fiscal 2000 there were only five months. In the latter
case, the Company agreed to settle a class action lawsuit filed against OLDE.
The Company denies liability with respect to these claims, but has determined to
settle the matter to avoid the costs, expenses, and distractions of further
litigation. Under the preliminarily approved settlement, which is subject to
final court approval, HRBFA will distribute $21 million to a fund to be used to
pay claims of class members, attorneys' fees and the administrative expenses
relating to the settlement. The Company accrued $16.8 million related to this
settlement in fiscal 2001.
ONE TO ONE | H&R BLOCK | 2001 25
<PAGE> 6
In April 2001 in an effort to improve profitability due to weak market
conditions, Investment services reduced its number of associates by 6%, which
resulted in a one-time charge of $1.6 million related to severance costs.
Severance charges for the full fiscal year totaled $2.7 million.
Trading Volume. In line with the market's general decline, the Company's
average trading volumes have fallen by more than 46% as measured by average
trades per day. HRBFA's trading volume has been historically linked with the
overall performance of the market indices, especially the Nasdaq.
Margin Lending. Impacted by market performance, volatility and investor
uncertainty, margin balances had fallen dramatically from $2.8 billion at the
end of fiscal 2000 to $1.3 billion at the end of fiscal 2001. This trend is
consistent with the rest of the industry and reflects the selling that occurred
as the market dropped. However, average margin balances for the five months of
fiscal 2000 compared to the twelve months of fiscal year 2001 were similar, $2.5
billion compared with $2.4 billion. Net interest margin, the blended rate of
interest earned on outstanding margin balances less the cost of all sources
funding margin loans, improved from 2.5% to 2.9% as reliance on higher-cost
funding sources decreased.
Principal Trading. Decimalization replaced fractional trading for listed
equities on January 29 and for Nasdaq equities on April 9. The impact of
decimalization has reduced the dealer spread between bid and ask prices,
reducing revenue opportunities. Overall principal trading revenue, including
fixed income trading and unit investment trusts, increased $16.8 million to
$63.3 million in fiscal 2001 from the previous fiscal year.
Continuing efforts to become an advisory-based relationship provider, a
number of key initiatives occurred despite the difficult financial and market
environment. The Company expanded its product line to include annuities and
expanded online capabilities. Under development are cash management capabilities
and fee-based services. The Express IRA product was launched in six tax services
regions, introducing new technology, sales activities, service functions and
training across the tax services and HRBFA organizations. Another key
cross-organization initiative was the creation and testing of the TPFA (Tax
Preparer Financial Advisor) program. In its pilot year, TPFAs, through tax
season, cross-sold 3,000 accounts. In addition, tax client referrals to HRBFA
resulted in approximately 15,000 new accounts. Finally, as of May 2001, 55,068
client tax returns were cross-sold to tax services from HRBFA. The Investment
services segment has yet to experience significant revenues from these
initiatives. Expenses for the development of cross-sell marketing systems also
impacted the decline in pretax earnings.
Investment services' EBITDA increased 16.7% to $78.1 million over the prior
year.
<Table>
<CAPTION>
Year Ended Variance
BUSINESS SERVICES April 30 Better (worse) than
--------------------------------------------------------------------------------
2001 2000 $ %
----------------------------------------------
<S> <C> <C> <C> <C>
Accounting, consulting & tax $ 319,750 $ 268,568 $ 51,182 19.1%
Product sales 20,960 16,533 4,427 26.8%
Management fee income 11,467 17,341 (5,874) -33.9%
Other 21,643 8,425 13,218 156.9%
----------------------------------------------
Total revenues 373,820 310,867 62,953 20.3%
==============================================
Compensation & benefits 240,660 182,592 (58,068) -31.8%
Occupancy & equipment 24,792 28,444 3,652 12.8%
Amortization of acquisition
intangibles 31,577 22,786 (8,791) -38.6%
Other 59,746 59,934 188 0.3%
----------------------------------------------
Total expenses 356,775 293,756 (63,019) -21.5%
----------------------------------------------
Pretax earnings $ 17,045 $ 17,111 $ (66) -0.4%
----------------------------------==============================================
</Table>
Business services revenues of $373.8 million increased 20.3% from $310.9
million in the prior year. The increase in revenues over the prior year is
attributable to: (a) the inclusion of RSM McGladrey for twelve months as
compared to nine months for the previous year ($43.8 million); (b) growth in
services including extended tax consulting services and insurance alliance
revenues ($44.7 million) and (c) services from newly acquired firms, net of the
lost revenue from sold offices. The increases in these areas were offset by a
decrease in revenue from technology consulting fees associated with year 2000
engagements, the decision to close certain unprofitable technology consulting
practices, and the change in organizational structure that affected attest
revenues discussed in the next paragraph.
26 ONE TO ONE | H&R BLOCK | 2001
<PAGE> 7
As of April 30, 2001, the operations of five of the original regional
accounting firms acquired had been merged into RSM McGladrey, the national
accounting firm that acquired substantially all of the non-attest assets of
McGladrey & Pullen, LLP on August 2, 1999. Prior to the mergers, for certain of
the regional accounting firms, the Company was required, in accordance with
Emerging Issues Task Force No. 97-2 - "Application of FASB Statement No. 94 and
APB Opinion No. 16 to Physician Practice Management Entities and Certain Other
Entities with Contractual Management Arrangements," to consolidate revenues and
expenses from the non-attest business that the Company owned and the attest
business of firms located in Kansas City, Chicago, Baltimore and Philadelphia
that the Company did not own, but for whom it performed management services.
Revenues are no longer consolidated as a result of the change in organizational
structure.
Pretax earnings were approximately equivalent to the prior year. This is
primarily due to a $3.5 million loss from RSM McGladrey during the first quarter
of fiscal 2001 that was not experienced in the prior year due to the timing of
the acquisition. This loss was offset by earnings from newly acquired firms and
net growth from the core business. EBITDA increased 20.9% to $55.8 million from
$46.2 million in fiscal 2000.
<Table>
<CAPTION>
Year Ended Variance
UNALLOCATED CORPORATE April 30 Better (worse) than
--------------------------------------------------------------------------------
2001 2000 $ %
------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $ 5,837 $ 4,668 $ 1,169 25.0%
==========================================
Compensation & benefits 14,376 6,114 (8,262) -135.1%
Interest expense 11,660 3,137 (8,523) -271.7%
Marketing & advertising 5,237 693 (4,544) -655.7%
Other 12,091 17,200 5,109 29.7%
------------------------------------------
Total expenses 43,364 27,144 (16,220) -59.8%
------------------------------------------
Pretax loss $(37,527) $(22,476) $ (15,051) -67.0%
==========================================
Interest expense on acquisition debt $ 98,759 $ 56,118 $ (42,641) -76.0%
--------------------------------------==========================================
</Table>
The unallocated corporate pretax loss for the year increased 67.0% to $37.5
million from $22.5 million in the comparable period last year. The increase is
primarily a result of higher employee costs and interest expense related to
borrowings for funding of operations, including share repurchases.
Interest expense on acquisition debt increased $42.6 million in fiscal 2001
compared to the prior year. The increase is primarily attributable to a full
year of financing costs associated with the acquisition of OLDE in December 1999
compared with only five months last year.
FISCAL 2000 COMPARED TO FISCAL 1999
SIGNIFICANT EVENTS IN FISCAL 2000
On December 1, 1999, the Company completed the purchase of all the issued and
outstanding shares of capital stock of OLDE, parent of H&R Block Financial
Advisors, Inc. (formerly OLDE Discount Corporation) a leading discount broker in
the United States. HRBFA offers brokerage and other financial services through a
nationwide network of approximately 1,400 registered representatives located in
105 OLDE offices and, since the acquisition, in 93 H&R Block Financial Centers.
The purchase price was $850 million in cash plus net tangible book value
payments of $48.5 million. The purchase agreement also provides for possible
future contingent consideration, payable for up to five years after the
acquisition based upon revenues generated from certain online brokerage services
and such consideration will be treated as purchase price when paid. The
transaction was accounted for as a purchase, and accordingly, OLDE's results are
included since the date of acquisition.
On August 2, 1999, the Company, through a subsidiary, RSM McGladrey,
completed the purchase of substantially all of the non-attest assets of
McGladrey & Pullen, LLP. McGladrey & Pullen, LLP was the nation's seventh
largest accounting and consulting firm with more than 70 offices located
primarily in the Eastern, Midwestern, Northern and Southwestern United States.
This acquisition significantly increased the size of the
ONE TO ONE | H&R BLOCK | 2001 27
<PAGE> 8
Business services segment, new in 1999. The purchase price was $240 million in
cash payments over four years and the assumption of certain pension liabilities
with a present value of $52.7 million. The purchase agreement also provides for
possible future contingent consideration based on a calculation of earnings in
years two, three and four after the acquisition and such consideration will be
treated as purchase price when paid. In addition, the Company made cash payments
of $65.5 million for outstanding accounts receivable and work-in-process that
have been repaid to the Company. The acquisition was accounted for as a
purchase, and accordingly, results are included since the date of acquisition.
<Table>
<CAPTION>
Year Ended Variance
CONSOLIDATED H&R BLOCK, INC. April 30 Better (worse) than
--------------------------------------------------------------------------------
2000 1999 $ %
----------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 2,451,943 $ 1,644,665 $ 807,278 49.1%
==============================================
Pretax earnings 412,266 383,541 28,725 7.5%
Net earnings $ 251,895 $ 215,366 $ 36,529 17.0%
----------------------------------==============================================
</Table>
Revenues increased 49.1% to $2.5 billion compared to $1.6 billion in fiscal
1999. Net earnings from continuing operations increased 5.9% to $251.9 million
from $237.8 million in the prior year. Basic net earnings per share from
continuing operations increased to $2.57 from $2.38 in 1999. Diluted net
earnings per share from continuing operations increased to $2.55 from $2.36.
EBITDA increased 36.3% to $598.0 million from $438.8 million in fiscal 1999.
The pretax amortization expense of acquired intangible assets increased
172.2% in fiscal 2000 to $66.3 million from $24.4 million in fiscal 1999.
Excluding the after-tax impact of this expense, net earnings from continuing
operations were $304.4 million, or $3.08 per diluted share in fiscal 2000,
compared to $254.2 million, or $2.52 per diluted share the prior year, increases
of 19.7% and 22.2%, respectively.
The effective tax rate for fiscal 2000 increased to 38.9% from 38.0% in
fiscal 1999. The increase is primarily due to non-deductible amortization of
goodwill and other intangible assets related to the OLDE acquisition.
An analysis of operations by reportable operating segment follows.
<Table>
<CAPTION>
Year Ended Variance
U.S. TAX OPERATIONS April 30 Better (worse) than
--------------------------------------------------------------------------------
2000 1999 $ %
----------------------------------------------
<S> <C> <C> <C> <C>
Tax preparation and related fees $ 1,128,891 $ 989,350 $ 139,541 14.1%
Royalties 128,870 114,902 13,968 12.2%
RAL participation fees 89,761 90,070 (309) -0.3%
Software sales 39,546 33,486 6,060 18.1%
Other 44,017 30,461 13,556 44.5%
----------------------------------------------
Total revenues 1,431,085 1,258,269 172,816 13.7%
==============================================
Compensation & benefits 550,287 472,443 (77,844) -16.5%
Occupancy & equipment 180,110 154,082 (26,028) -16.9%
Depreciation & amortization 66,522 49,381 (17,141) -34.7%
Cost of software sales 22,430 17,266 (5,164) -29.9%
Bad debt expense 32,541 56,116 23,575 42.0%
Marketing & advertising 96,922 71,512 (25,410) -35.5%
Other 162,281 123,356 (38,925) -31.6%
----------------------------------------------
Total expenses 1,111,093 944,156 (166,937) -17.7%
----------------------------------------------
Pretax earnings $ 319,992 $ 314,113 $ 5,879 1.9%
----------------------------------==============================================
</Table>
28 ONE TO ONE | H&R BLOCK | 2001
<PAGE> 9
Revenues increased 13.7% to $1.4 billion from $1.3 billion in fiscal 1999.
Combined tax preparation and related fees generated from clients visiting a tax
office increased $139.5 million, or 14.1%, due to pricing increases and a 2.2%
increase in clients served in company-owned offices. Fees associated with
participation interests in RALs decreased 0.3% to $89.8 million due to lower
pricing as a result of the Internal Revenue Service re-instatement of the Debt
Indicator Program and a pilot program offering RALs with no bank charge in
certain geographical areas. These two factors decreased the average revenue per
RAL by 22.8%. Royalty revenues increased 12.2% to $128.9 million due to pricing
increases and a 2.6% increase in clients served by franchises. Revenues from
software sales increased $6.1 million, or 18.1%, due to an increase in
electronic filing fees generated through the clients' use of the Company's tax
preparation software as well as an increase in the number of software units
sold.
Operating earnings increased 1.9% to $320.0 million from $314.1 million in
1999. The pretax margin decreased to 22.4% from 25.0% in 1999, due to higher
spending related to new initiatives and overstaffing in tax offices in April due
to anticipated client demand that did not occur. New initiatives included the
start-up of e-commerce services, the offer of RALs with no bank charge, and the
new prepaid spending card program, Refund Rewards(TM).
EBITDA was $386.5 million for fiscal 2000, up from $363.5 million in 1999.
<Table>
<CAPTION>
Year Ended Variance
INTERNATIONAL TAX OPERATIONS April 30 Better (worse) than
--------------------------------------------------------------------------------
2000 1999 $ %
----------------------------------------------
<S> <C> <C> <C> <C>
Canada $ 61,102 $ 58,504 $ 2,598 4.4%
Australia 17,573 14,540 3,033 20.9%
United Kingdom 1,595 692 903 130.5%
Overseas franchises 1,248 978 270 27.6%
----------------------------------------------
Total revenues 81,518 74,714 6,804 9.1%
==============================================
Canada 3,291 2,450 841 34.3%
Australia 3,189 2,267 922 40.7%
United Kingdom (1,958) (2,559) 601 23.5%
Overseas franchises 347 356 (9) -2.5%
----------------------------------------------
Pretax earnings $ 4,869 $ 2,514 $ 2,355 93.7%
----------------------------------==============================================
</Table>
Revenues increased 9.1% to $81.5 million from $74.7 million in 1999. Pretax
earnings increased 93.7% to $4.9 million from $2.5 million in 1999, and the
pretax margin increased to 6.0% from 3.4% in 1999. The increase in pretax
earnings is due to better results in Australia and Canada. EBITDA was $10.4
million, up from $8.3 million in the prior year.
Australia's revenues increased 20.9% to $17.6 million from $14.5 million.
Pretax earnings increased 40.7% to $3.2 million from $2.3 million. These results
reflect the strong Australian dollar. The increases are due to a 12.7% increase
in volume in company-owned offices, along with an increase in the pretax margin
to 18.1% from 15.6% in 1999.
Canada's revenues increased 4.4% to $61.1 million from $58.5 million in
1999. Pretax earnings increased 34.3% to $3.3 million from $2.5 million. The
number of regular returns prepared in company-owned offices decreased 8.2%,
while the number of cash back returns prepared increased 7.6%. The improvement
in pretax earnings is primarily due to the lowering of certain expenses from
closing less profitable offices and improved expense control.
Revenues in the United Kingdom increased 130.5% to $1.6 million from $692
thousand in fiscal 1999. Pretax losses decreased 23.5% to $2.0 million from $2.6
million in 1999. The improved results were primarily due to a March 1999
acquisition and increased revenue in existing tax offices, leveraged over
certain fixed costs.
ONE TO ONE | H&R BLOCK | 2001 29
<PAGE> 10
<Table>
<CAPTION>
Year Ended Variance
MORTGAGE OPERATIONS April 30 Better (worse) than
--------------------------------------------------------------------------------
2000 1999 $ %
-------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 92,155 $ 85,160 $ 6,995 8.2%
Loan servicing income 62,510 38,681 23,829 61.6%
Gain on sale of mortgage loans 199,608 130,337 69,271 53.2%
Other 1,156 1,766 (610) -34.5%
-------------------------------------------
Total revenues 355,429 255,944 99,485 38.9%
===========================================
Compensation & benefits 103,049 64,354 (38,695) -60.1%
Variable servicing & processing 20,338 14,400 (5,938) -41.2%
Occupancy & equipment 15,462 10,053 (5,409) -53.8%
Interest expense 56,988 52,018 (4,970) -9.6%
Bad debt expense 8,808 13,171 4,363 33.1%
Amortization of acquisition
intangibles 13,760 12,574 (1,186) -9.4%
Other 48,450 26,625 (21,825) -82.0%
-------------------------------------------
Total expenses 266,855 193,195 (73,660) -38.1%
-------------------------------------------
Pretax earnings $ 88,574 $ 62,749 $ 25,825 41.2%
-------------------------------------===========================================
</Table>
Revenues increased 38.9% to $355.4 million from $255.9 million in 1999.
Pretax earnings increased 41.2% to $88.6 million from $62.7 million. Option One
reported revenues of $322.0 million, up 45.3% from $221.6 million in the prior
year. Pretax earnings increased 49.9% to $95.0 million from $63.4 million in
1999. Option One originated $5.7 billion of loans in fiscal 2000, up 58.0% from
$3.6 billion in 1999, and sold or securitized $6.1 billion of loans, up 73.7%
from $3.5 billion in 1999. At April 30, 2000, Option One's servicing portfolio
was 114,300 loans totaling $11.3 billion, up from 65,300 loans totaling $6.5
billion at April 30, 1999. The increase in loans serviced, originated and sold
drove Option One's revenue increase. Although certain expenses increased as
Option One pursued growth plans, the increase in revenues and contribution
margins exceeded the higher expenses and led to the increase in pretax earnings.
EBITDA increased to $108.9 million from $78.5 million in 1999.
<Table>
<CAPTION>
Year Ended Variance
INVESTMENT SERVICES April 30 Better (worse) than
--------------------------------------------------------------------------------
2000 1999 $ %
-------------------------------------------
<S> <C> <C> <C> <C>
Commission & fee income $ 177,370 $ 3,859 $ 173,511 -
Margin interest income 79,416 - 79,416 -
Other 11,590 130 11,460 -
-------------------------------------------
Total revenues 268,376 3,989 264,387 -
===========================================
Compensation & benefits 87,590 973 (86,617) -
Interest expense 41,563 - (41,563) -
Occupancy & equipment 12,551 195 (12,356) -
Depreciation & amortization 6,058 149 (5,909) -
Commission, floor brokerage & fees 15,553 3,106 (12,447) -400.7%
Amortization of acquisition
intangibles 19,605 55 (19,550) -
Other 44,230 1,134 (43,096) -
-------------------------------------------
Total expenses 227,150 5,612 (221,538) -
-------------------------------------------
Pretax earnings (loss) $ 41,226 $ (1,623) $ 42,849 -
-------------------------------------===========================================
</Table>
Revenues increased $264.4 million to $268.4 million from $4.0 million in
1999. Pretax earnings increased $42.8 million to $41.2 million from a loss of
$1.6 million last year. The increase in revenues and pretax earnings is due to
the first-time inclusion of OLDE's financial results for five months in fiscal
2000. EBITDA increased to $66.9 million from a negative $1.4 million in 1999.
30 ONE TO ONE | H&R BLOCK | 2001
<PAGE> 11
Since the acquisition date, OLDE contributed revenues of $253.9 million and
pretax earnings of $66.8 million, driven by high market trading volume yielding
over 1.8 million trades. At April 30, 2000, OLDE had 658,000 active accounts and
managed client assets of $44 billion.
<Table>
<CAPTION>
Year Ended Variance
BUSINESS SERVICES April 30 Better (worse) than
--------------------------------------------------------------------------------
2000 1999 $ %
----------------------------------------------
<S> <C> <C> <C> <C>
Accounting, consulting & tax $ 268,568 $ 43,369 $ 225,199 519.3%
Product sales 16,533 3,703 12,830 346.5%
Management fee income 17,341 183 17,158 -
Other 8,425 86 8,339 -
----------------------------------------------
Total revenues 310,867 47,341 263,526 556.7%
==============================================
Compensation & benefits 182,592 29,903 (152,689) -510.6%
Occupancy & equipment 28,444 2,815 (25,629) -910.4%
Amortization of acquisition
intangibles 22,786 2,845 (19,941) -700.9%
Other 59,934 4,657 (55,277) -
----------------------------------------------
Total expenses 293,756 40,220 (253,536) -630.4%
----------------------------------------------
Pretax earnings $ 17,111 $ 7,121 $ 9,990 140.3%
----------------------------------==============================================
</Table>
Revenues increased to $310.9 million from $47.3 million in 1999. Pretax
earnings increased 140.3% to $17.1 million from $7.1 million last year. The
increase in both revenues and pretax earnings is largely due to the first-time
inclusion of RSM McGladrey financial results for nine months in fiscal 2000, and
the inclusion for the entire year in fiscal 2000 of the results from six
regional accounting firms acquired at various times during fiscal 1999. EBITDA
increased to $46.2 million from $10.5 million last year.
<Table>
<CAPTION>
Year Ended Variance
UNALLOCATED CORPORATE April 30 Better (worse) than
--------------------------------------------------------------------------------
2000 1999 $ %
----------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $ 4,668 $ 4,408 $ 260 5.9%
=============================================
Compensation & benefits 6,114 9,672 3,558 36.8%
Interest expense 3,137 1,381 (1,756) -127.2%
Marketing & advertising 693 432 (261) -60.4%
Other 17,200 13,652 (3,548) -26.0%
---------------------------------------------
Total expenses 27,144 25,137 (2,007) -8.0%
---------------------------------------------
Pretax loss $ (22,476) $ (20,729) $ (1,747) -8.4%
=============================================
Interest expense on acquisition
debt $ 56,118 $ 17,757 $ (38,361) -216.0%
----------------------------------=============================================
</Table>
The unallocated corporate pretax loss increased to $22.5 million from $20.7
million in 1999.
Interest expense on debt incurred for business acquisitions increased
216.0% to $56.1 million from $17.8 million in 1999. The increase is due to
borrowings associated with RSM McGladrey and OLDE acquisitions during fiscal
2000.
Net investment income decreased 74.2% to $8.3 million from $32.2 million in
the prior year. The decrease is a result of less cash available for investment
due to business acquisitions and share repurchases throughout fiscal 2000.
ONE TO ONE | H&R BLOCK | 2001 31
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
Cash and marketable securities, excluding trading securities, were $550.2
million at April 30, 2001, compared to $636.2 million at April 30, 2000. Working
capital decreased to $282.8 million at April 30, 2001 from $346.1 million at
April 30, 2000. The working capital ratio at April 30, 2001 is 1.14 to 1,
compared to 1.10 to 1 at April 30, 2000. The increase in the working capital
ratio is primarily attributable to the decrease in short-term borrowings.
The Company incurs short-term borrowings throughout the year primarily to
fund receivables associated with its Business services, mortgage loans held for
sale, and participation in RALs, and to fund seasonal working capital needs.
These short-term borrowings in the U.S. are supported by a $1.86 billion back-up
credit facility through October 2001, subject to annual renewal.
In Canada, from January through April each year, the Company uses Canadian
borrowings to purchase refunds due its clients from Revenue Canada. Maturities
of these borrowings range from 30 to 90 days. Net accounts receivable at April
30, 2001 and 2000 include amounts due from Revenue Canada of $11.8 million and
$17.1 million, respectively.
In April 2000, the Company first entered into third party off-balance sheet
arrangements and whole-loan sale arrangements for Option One. These
arrangements, modified in April 2001, allow the Company to originate mortgage
loans and then sell the loans to a qualified special purpose entity without
having to use the Company's short-term borrowings to fund the loans. The
arrangements, which are not guaranteed by H&R Block, freed up excess cash and
short-term borrowing capacity ($633.8 million at April 30, 2001), improved
liquidity and flexibility, and reduced balance sheet risk, while providing
stability and access to liquidity in the secondary market for mortgage loans.
The Company has commitments to fund mortgage loans of $1.5 billion at April 30,
2001 as long as there is no violation of any conditions established in the
contracts. External market forces impact the probability of commitments being
exercised, and therefore, total commitments outstanding do not necessarily
represent future cash requirements. If the commitments are exercised they will
be funded using the Company's off-balance sheet arrangements.
At April 30, 2001, the Company had no short-term borrowings, a decrease
from $283.8 million at April 30, 2000. The Company's capital expenditures,
dividend payments, share repurchase program, Business services acquisition
payments and normal operating activities, including RALs, during the year were
funded through both internally-generated funds and short-term borrowings.
For the twelve months ended April 30, 2001 and 2000, interest expense was
$242.6 million and $155.0 million, respectively. The increase in interest
expense is due to the inclusion of operating interest expense associated with
the borrowing activities of OLDE for a full year ($106.3 million) compared to
only five months in the prior year and acquisition interest expense of $70.7
million related to the OLDE acquisition in December 1999. These increases were
partially offset by lower interest expense from Mortgage operations because the
Company sells the majority of its mortgage loans on the same day they are funded
and essentially no longer incurs short-term borrowings to fund its mortgage
loans.
In April 2000, the Company issued $500 million of 8 1/2 % Senior Notes, due
2007. The Senior Notes are not redeemable prior to maturity. The net proceeds of
this transaction were used to repay a portion of the initial short-term
borrowings for the OLDE acquisition.
In October 1997, the Company issued $250 million of 6 3/4% Senior Notes,
due 2004. The Senior Notes are not redeemable prior to maturity. The net
proceeds of this transaction were used to repay short-term borrowings which
initially funded the acquisition of Option One.
Long-term debt at April 30, 2001 was comprised of the $750 million of
Senior Notes described above, future payments related to the acquisitions of RSM
McGladrey and other accounting firms, capital lease obligations and mortgage
notes. The current portion of long-term debt was $51.8 million, down from $68.0
million last year, due to payments made during fiscal 2001 with the remaining
amount representing payments to be made during fiscal 2002 for accounting firm
acquisitions, capital lease obligations and mortgage notes. Long-term debt
decreased to $871.0 million from $872.4 million at April 30, 2000 due to
obligations moving to current and fewer accounting firm acquisitions during the
year. Stockholders' equity at April 30, 2001 and 2000 was $1.2 billion. The
Company's debt to total equity ratio at April 30, 2001 was 44%, compared with
50% last year.
Management anticipates a higher level of capital expenditures in 2002,
exclusive of acquisitions, than in fiscal 2001. Capital expenditures are
expected to increase to support the execution of the Company's strategy. The
Company will continue to use short-term financing in the United States to
finance various financial activities conducted by Block Financial Corporation
and in Canada to finance the Canadian refund discount program.
32 ONE TO ONE | H&R BLOCK | 2001
<PAGE> 13
In March 2000, the Company's Board of Directors approved a plan to
repurchase up to 12 million shares of its common stock. At April 30, 2001, 7.2
million shares had been repurchased under this plan, with 6.8 million shares
purchased during fiscal 2001. The Company plans to continue to purchase its
shares on the open market in accordance with this authorization, subject to
various factors including the price of the stock, the ability to maintain
progress toward a financial and capital structure that will support a mid single
A rating (Moody's - A2; Standard & Poors - A; and Fitch - A), the availability
of excess cash, the ability to maintain liquidity and financial flexibility,
securities laws restrictions and other investment opportunities available.
OTHER ISSUES
On June 20, 2001, the Company's Board of Directors declared a two-for-one split
of its Common Stock in the form of a 100% stock distribution effective August 1,
2001, to shareholders of record as of the close of business on July 10, 2001.
Unaudited proforma net earnings per share data is presented in the notes to
consolidated financial statements.
The Notes to Consolidated Financial Statements, as well as other
information contained in this Annual Report to Shareholders may contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such
statements are based upon current information, expectations, estimates and
projections regarding the Company, the industries and markets in which the
Company operates, and management's assumptions and beliefs relating thereto.
Words such as "will," "plan," "expect," "remain," "intend," "estimate,"
"approximate," and variations thereof and similar expressions are intended to
identify such forward-looking statements. These statements speak only as of the
date on which they are made, are not guarantees of future performance, and
involve certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual outcomes and results could materially differ from
what is expressed, implied or forecast in such forward-looking statements. Such
differences could be caused by a number of factors including, but not limited
to, the uncertainty of laws, legislation, regulations, supervision and licensing
by Federal, state and local authorities and their impact on any lines of
business in which the Company's subsidiaries are involved; unforeseen compliance
costs; changes in economic, political or regulatory environments; changes in
competition and the effects of such changes; the inability to implement the
Company's strategies; changes in management and management strategies; the
Company's inability to successfully design, create, modify and operate its
computer systems and networks; new accounting standards; litigation involving
the Company; the uncertainties of the extent of share repurchases and their
effect on earnings per share; and risks described from time to time in reports
and registration statements filed by the Company and its subsidiaries with the
Securities and Exchange Commission. Readers should take these factors into
account in evaluating any such forward-looking statements. The Company
undertakes no obligation to update publicly or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
ONE TO ONE | H&R BLOCK | 2001 33
<PAGE> 14
CONSOLIDATED STATEMENTS OF EARNINGS
Amounts in thousands, except per share amounts
<TABLE>
<CAPTION>
Year Ended April 30 2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Service revenues $ 2,441,448 $ 2,021,162 $ 1,335,177
Product sales 368,844 267,336 176,508
Royalties 149,683 138,903 124,323
Other 41,600 24,542 8,657
-------------------------------------------
3,001,575 2,451,943 1,644,665
-------------------------------------------
EXPENSES:
Employee compensation and benefits 1,192,294 963,536 610,866
Occupancy and equipment 283,181 253,171 182,701
Interest 242,551 155,027 69,338
Depreciation and amortization 205,608 147,218 74,605
Marketing and advertising 143,559 140,683 90,056
Supplies, freight and postage 70,440 64,599 57,157
Bad debt 84,422 51,719 71,662
Other 314,454 273,902 133,206
-------------------------------------------
2,536,509 2,049,855 1,289,591
-------------------------------------------
Operating earnings 465,066 402,088 355,074
OTHER INCOME:
Investment income, net 5,977 9,840 32,234
Other, net 2,035 338 (3,767)
-------------------------------------------
8,012 10,178 28,467
-------------------------------------------
Earnings from continuing operations before income taxes 473,078 412,266 383,541
Taxes on earnings 196,330 160,371 145,746
-------------------------------------------
NET EARNINGS FROM CONTINUING OPERATIONS
BEFORE CHANGE IN ACCOUNTING PRINCIPLE 276,748 251,895 237,795
Net loss from discontinued operations (less applicable income
tax benefit of $953) - - (1,490)
Net loss on sale of discontinued operations (less
applicable income tax benefit of $13,387) - - (20,939)
Cumulative effect of change in accounting principle for derivatives and
hedging activities (less applicable income taxes of $2,717) 4,414 - -
-------------------------------------------
NET EARNINGS $ 281,162 $ 251,895 $ 215,366
===========================================
BASIC NET EARNINGS PER SHARE:
Net earnings from continuing operations $ 3.01 $ 2.57 $ 2.38
Net loss from discontinued operations - - (.22)
Cumulative effect of change in accounting principle .05 - -
-------------------------------------------
Net earnings $ 3.06 $ 2.57 $ 2.16
===========================================
DILUTED NET EARNINGS PER SHARE:
Net earnings from continuing operations $ 2.99 $ 2.55 $ 2.36
Net loss from discontinued operations - - (.22)
Cumulative effect of change in accounting principle .05 - -
-------------------------------------------
Net earnings $ 3.04 $ 2.55 $ 2.14
----------------------------------------------------------------------------===========================================
</TABLE>
See notes to consolidated financial statements.
34 ONE TO ONE | H&R BLOCK | 2001
<PAGE> 15
CONSOLIDATED BALANCE SHEETS
Amounts in thousands, except share data
<TABLE>
<CAPTION>
April 30 2001 2000
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 271,813 $ 379,901
Marketable securities - available-for-sale 8,266 16,966
Marketable securities - trading 46,158 45,403
Receivables from customers, brokers, dealers and clearing organizations,
less allowance for doubtful accounts of $1,692 and $759 1,310,804 2,857,379
Receivables, less allowance for doubtful accounts of $47,125 and $49,602 373,223 434,722
Prepaid expenses and other current assets 260,942 145,741
----------------------------
Total current assets 2,271,206 3,880,112
INVESTMENTS AND OTHER ASSETS:
Investments in available-for-sale marketable securities 270,159 239,297
Excess of cost over fair value of net tangible assets acquired,
less accumulated amortization of $231,697 and $130,305 1,051,826 1,095,074
Other 239,586 198,887
----------------------------
1,561,571 1,533,258
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization of $324,287 and $225,967 288,847 299,499
----------------------------
$ 4,121,624 $ 5,712,869
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ - $ 283,797
Accounts payable to customers, brokers and dealers 1,058,000 2,570,200
Accounts payable, accrued expenses and deposits 361,210 222,362
Accrued salaries, wages and payroll taxes 221,830 173,333
Accrued taxes on earnings 295,599 216,298
Current portion of long-term debt 51,763 67,978
----------------------------
Total current liabilities 1,988,402 3,533,968
LONG-TERM DEBT 870,974 872,396
OTHER NONCURRENT LIABILITIES 88,507 87,916
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par, stated value $.01 per share,
authorized 400,000,000 shares 1,089 1,089
Convertible preferred stock, no par, stated
value $.01 per share, authorized 500,000 shares - -
Additional paid-in capital 419,957 420,594
Accumulated other comprehensive income (loss) (42,767) (26,241)
Retained earnings 1,450,112 1,277,324
----------------------------
1,828,391 1,672,766
Less cost of common stock in treasury 654,650 454,177
----------------------------
1,173,741 1,218,589
----------------------------
$ 4,121,624 $ 5,712,869
---------------------------------------------------------------------------------============================
</TABLE>
See notes to consolidated financial statements.
ONE TO ONE | H&R BLOCK | 2001 35
<PAGE> 16
CONSOLIDATED STATEMENTS OF CASH FLOWS
Amounts in thousands
<TABLE>
<CAPTION>
Year Ended April 30 2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 281,162 $ 251,895 $ 215,366
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 205,608 147,218 74,605
Provision for bad debt 84,422 51,719 71,662
Accretion of acquisition liabilities 11,863 10,641 -
Provision for deferred taxes on earnings (38,870) (29,286) 1,739
Net (gain) loss on sales of operating units (2,040) 14,501 20,939
Cumulative effect of change in accounting principle (4,414) - -
Net gain on sales of available-for-sale securities (17,744) (11,697) (4,124)
Changes in assets and liabilities, net of acquisitions:
Receivables from customers, brokers, dealers and
clearing organizations 1,544,640 (893,435) -
Receivables (484,836) (409,690) 112,073
Mortgage loans held for sale:
Originations and purchases (7,254,552) (5,967,895) (4,290,207)
Sales and principal repayments 7,336,659 6,442,094 4,201,187
Marketable securities - trading (755) 6,899 -
Prepaid expenses and other current assets (88,515) (52,551) (27,952)
Accounts payable to customers, brokers and dealers (1,512,200) 868,012 -
Accounts payable, accrued expenses and deposits 138,499 3,732 46,029
Accrued salaries, wages and payroll taxes 48,901 13,683 55,178
Accrued taxes on earnings 66,465 68,316 (260,458)
Other, net (18,778) (23,578) 23,237
------------------------------------------------
Net cash provided by operating activities 295,515 490,578 239,274
------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities (10,636) (14,281) (251,627)
Maturities of available-for-sale securities 21,524 68,261 219,400
Sales of available-for-sale securities 356,192 211,836 522,252
Purchases of property and equipment, net (90,033) (141,856) (89,782)
Payments made for business acquisitions, net of cash acquired (21,143) (971,802) (123,657)
Proceeds from sale of subsidiary 23,200 - -
Other, net (20,497) (6,505) (25,643)
------------------------------------------------
Net cash provided by (used in) investing activities 258,607 (854,347) 250,943
------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (18,219,741) (50,800,661) (17,276,595)
Proceeds from issuance of notes payable 17,935,944 51,012,519 16,593,978
Proceeds from issuance of long-term debt - 495,800 -
Payments on acquisition debt (68,743) (4,730) -
Dividends paid (108,374) (105,480) (95,004)
Payments to acquire treasury shares (222,895) (50,654) (492,945)
Proceeds from stock options exercised 19,550 36,958 73,481
Other, net 2,049 (33,322) (748)
------------------------------------------------
Net cash provided by (used in) financing activities (662,210) 550,430 (1,197,833)
------------------------------------------------
Net increase (decrease) in cash and cash equivalents (108,088) 186,661 (707,616)
Cash and cash equivalents at beginning of the year 379,901 193,240 900,856
------------------------------------------------
Cash and cash equivalents at end of the year $ 271,813 $ 379,901 $ 193,240
================================================
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid $ 150,784 $ 122,447 $ 394,273
Interest paid 230,448 141,577 71,431
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
36 ONE TO ONE | H&R BLOCK | 2001
<PAGE> 17
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Amounts in thousands
<TABLE>
<CAPTION>
Convertible
Common Stock Preferred Stock Additional
------------------------ -------------------- Paid-in Retained
Shares Amount Shares Amount Capital Earnings
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at May 1, 1998 108,973 $ 1,089 2 $ - $ 432,335 $ 1,010,547
Net earnings for the year - - - - - 215,366
Unrealized loss on translation - - - - - -
Change in net unrealized gain
on marketable securities - - - - - -
Comprehensive income - - - - - -
Stock options exercised - - - - (12,042) -
Restricted stock granted - - - - (81) -
Stock issued for acquisition - - - - 807 -
Conversion of Convertible
Preferred Stock - - (2) - (361) -
Acquisition of treasury shares - - - - - -
Cash dividends paid -
$.95 per share - - - - - (95,004)
-----------------------------------------------------------------------------------
Balances at April 30, 1999 108,973 1,089 - - 420,658 1,130,909
Net earnings for the year - - - - - 251,895
Unrealized loss on translation - - - - - -
Change in net unrealized gain
on marketable securities - - - - - -
Comprehensive income - - - - - -
Stock options exercised - - - - (1,567) -
Restricted stock granted - - - - 200 -
Stock issued for acquisition - - - - 1,306 -
Conversion of Convertible
Preferred Stock - - - - (3) -
Acquisition of treasury shares - - - - - -
Cash dividends paid -
$1.075 per share - - - - - (105,480)
-----------------------------------------------------------------------------------
Balances at April 30, 2000 108,973 1,089 - - 420,594 1,277,324
Net earnings for the year - - - - - 281,162
Unrealized loss on translation - - - - - -
Change in net unrealized gain
on marketable securities - - - - - -
Comprehensive income - - - - - -
Stock options exercised - - - - (68) -
Restricted stock granted - - - - (382) -
Stock issued for ESPP - - - - (187) -
Acquisition of treasury shares - - - - - -
Cash dividends paid -
$1.175 per share - - - - - (108,374)
-----------------------------------------------------------------------------------
Balances at April 30, 2001 108,973 $ 1,089 - $ - $ 419,957 $ 1,450,112
--------------------------------------===================================================================================
<CAPTION>
Accumulated
Treasury Stock Other
-------------------------- Comprehensive Total
Shares Amount Income (loss) Equity
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances at May 1, 1998 (1,992) $ (77,822) $ (24,517) $ 1,341,632
Net earnings for the year - - - -
Unrealized loss on translation - - (1,525) -
Change in net unrealized gain
on marketable securities - - 2,642 -
Comprehensive income - - - 216,483
Stock options exercised 2,175 90,462 - 78,420
Restricted stock granted 37 1,544 - 1,463
Stock issued for acquisition 268 11,053 - 11,860
Conversion of Convertible
Preferred Stock 11 439 - 78
Acquisition of treasury shares (11,843) (492,945) - (492,945)
Cash dividends paid -
$.95 per share - - - (95,004)
------------------------------------------------------------
Balances at April 30, 1999 (11,344) (467,269) (23,400) 1,061,987
Net earnings for the year - - - -
Unrealized loss on translation - - (2,647) -
Change in net unrealized gain
on marketable securities - - (194) -
Comprehensive income - - - 249,054
Stock options exercised 1,023 42,268 - 40,701
Restricted stock granted 43 1,781 - 1,981
Stock issued for acquisition 475 19,694 - 21,000
Conversion of Convertible
Preferred Stock 1 3 - -
Acquisition of treasury shares (1,136) (50,654) - (50,654)
Cash dividends paid -
$1.075 per share - - - (105,480)
------------------------------------------------------------
Balances at April 30, 2000 (10,938) (454,177) (26,241) 1,218,589
Net earnings for the year - - - -
Unrealized loss on translation - - (11,864) -
Change in net unrealized gain
on marketable securities - - (4,662) -
Comprehensive income - - - 264,636
Stock options exercised 501 19,121 - 19,053
Restricted stock granted 57 2,252 - 1,870
Stock issued for ESPP 28 1,049 - 862
Acquisition of treasury shares (6,816) (222,895) - (222,895)
Cash dividends paid -
$1.175 per share - - - (108,374)
------------------------------------------------------------
Balances at April 30, 2001 (17,168) $ (654,650) $ (42,767) $ 1,173,741
-------------------------------------============================================================
</TABLE>
See notes to consolidated financial statements.
ONE TO ONE | H&R BLOCK | 2001 37
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in thousands, except share data
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: The operating subsidiaries of H&R Block, Inc. provide a
variety of services to the general public, principally in the United States, but
also in Canada, Australia and other foreign countries. Approximately $1,733,700,
or 58% of total revenues for the year ended April 30, 2001 were generated from
tax return preparation, electronic filing of tax returns and other tax-related
services. Certain of these subsidiaries also originate, service, and sell
nonconforming and conforming mortgages, offer investment services through
broker-dealers, offer personal productivity software, participate in refund
anticipation loan products offered by a third-party lending institution, and
offer accounting, tax and consulting services to business clients.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of H&R Block, Inc. (the "Company"), all majority-owned subsidiaries
and companies that are directly or indirectly controlled by the Company through
majority ownership or otherwise. All material intercompany transactions and
balances have been eliminated.
Some of the Company's subsidiaries operate in regulated industries, and
their underlying accounting records reflect the policies and requirements of
these industries.
RECLASSIFICATIONS: Certain reclassifications have been made to prior year
amounts to conform with the current year presentation.
MANAGEMENT ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash on hand
and due from banks and securities purchased under agreements to resell. For
purposes of the consolidated statements of cash flows, the Company considers all
highly liquid instruments purchased with an original maturity of three months or
less to be cash equivalents.
The Company's broker-dealers purchase securities under agreements to resell
and account for them as collateralized financings. The securities are carried at
the amounts at which the securities will be subsequently resold, as specified in
the respective agreements. Collateral relating to investments in repurchase
agreements is held by independent custodian banks. The securities are revalued
daily and collateral added whenever necessary to bring market value of the
underlying collateral equal to or greater than the repurchase specified in the
contracts.
MARKETABLE SECURITIES - AVAILABLE-FOR-SALE: Certain marketable debt and
equity securities are classified as available-for-sale, based on management's
intentions, and are carried at market value, based on quoted prices, with
unrealized gains and losses included in other comprehensive income.
Certain residual interests in securitizations of real estate mortgage
investment conduits ("REMICs") and in net interest margin ("NIM") transactions
are recorded as a result of the Company's securitization of mortgage loans
through various special-purpose trust vehicles. These residual interests are
classified as available-for-sale securities, and are carried at market value,
based on discounted cash flow models, with unrealized gains and losses included
in other comprehensive income. The residual interests are amortized over the
estimated life of the related loan's cash flows. If losses are determined to be
other-than-temporary, the residual is written down to fair value with the
realized loss included in the consolidated statements of earnings.
The cost of marketable securities sold is determined on the specific
identification method and realized gains and losses are reflected in earnings.
MARKETABLE SECURITIES - TRADING: Certain marketable debt and equity
securities are classified as trading, and are held by the Company's
broker-dealers. Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" is not applicable to
broker-dealers. These securities are carried at market value, based on quoted
prices, with unrealized gains and losses included in earnings.
Certain residual interests in securitizations of REMICs are classified as
trading, based on management's intentions and criteria as established by the
Company, and are carried at market value, based on discounted cash flow models,
with unrealized gains and losses included in earnings.
RECEIVABLES FROM CUSTOMERS, BROKERS, DEALERS AND CLEARING ORGANIZATIONS AND
ACCOUNTS PAYABLE TO CUSTOMERS, BROKERS AND DEALERS: Customer receivables and
payables consist primarily of amounts due on margin and cash transactions. These
receivables are collateralized by customers' securities held, which are not
reflected in the accompanying consolidated financial statements.
Receivables from brokers are generally collected within 30 days and are
collateralized by securities in physical possession of, or on deposit
38 ONE TO ONE | H&R BLOCK | 2001
<PAGE> 19
with the Company or receivables from customers or other brokers. The allowance
for doubtful accounts represents an amount considered by management to be
adequate to cover potential losses.
RECEIVABLES: Receivables consist primarily of business services accounts
receivable and mortgage loans held for sale. Mortgage loans held for sale are
carried at the lower of cost or market value. The allowance for doubtful
accounts represents an amount considered by management to be adequate to cover
potential losses.
FOREIGN CURRENCY TRANSLATION: Assets and liabilities of the Company's
foreign subsidiaries are translated into U.S. dollars at exchange rates
prevailing at the end of the year. Revenue and expense transactions are
translated at the average of exchange rates in effect during the period.
Translation gains and losses are recorded in other comprehensive income.
EXCESS OF COST OVER FAIR VALUE OF NET TANGIBLE ASSETS ACQUIRED: The excess
of cost of purchased subsidiaries, operating offices and franchises over the
fair value of net tangible assets acquired is being amortized over a weighted
average life of 14 years on a straight-line basis.
At each balance sheet date, the Company assesses long-lived assets,
including intangibles, for impairment by comparing the carrying value to future
undiscounted cash flows. To the extent that there is impairment, analysis is
performed based on several criteria, including, but not limited to, revenue
trends, discounted operating cash flows and other operating factors to determine
the impairment amount. In addition, a determination is made by management to
ascertain whether goodwill has been impaired. Analysis is performed on an
operating business unit basis using the fair value method. If the review
indicates that goodwill is not recoverable, the Company would recognize an
impairment loss. Under these methods, no material impairment adjustments to
goodwill, other intangibles or other long-lived assets were made during fiscal
year 2001, 2000, or 1999.
MORTGAGE SERVICING RIGHTS: Mortgage servicing rights ("MSRs") are retained
in the sale or securitization of mortgage loans and are recorded based on the
present value of estimated future cash flows related to servicing loans. The
MSRs are amortized to earnings in proportion to, and over the period of,
estimated net future servicing income. MSRs are periodically reviewed for
impairment. Impairment is assessed based on the fair value of each risk stratum.
The Company stratifies MSRs using the following risk characteristics: loan sale
date (which approximates date of origination); and loan type (6-month
adjustable, 2 to 3-year adjustable and 30-year fixed). Fair values take into
account the historical prepayment activity of the related loans and management's
estimates of the remaining future cash flows to be generated by the underlying
mortgage loans. When MSRs are reviewed, management makes an estimate of the
future prepayment rates and other key variables of the underlying mortgage
loans, and if actual performance proves to be worse than the estimate,
impairment of MSRs could occur. At April 30, 2001 and 2000, impairment did not
exist in any stratum.
PROPERTY AND EQUIPMENT: Buildings and equipment are stated at cost and are
depreciated over the estimated useful lives of the assets using the
straight-line method. Leasehold improvements are stated at cost and are
amortized over the lesser of the term of the respective lease or the estimated
useful life, using the straight-line method. Estimated useful lives are 15 to 40
years for buildings, 3 to 5 years for computers and other equipment and up to 8
years for leasehold improvements.
The Company capitalizes certain costs associated with software developed or
obtained for internal use. These costs are amortized over 36 months using the
straight-line method.
NOTES PAYABLE: The Company uses short-term borrowings to finance temporary
liquidity needs and various financial activities conducted by its subsidiaries.
There were no notes payable outstanding at April 30, 2001. The weighted average
interest rate of notes payable at April 30, 2000 was 6.2%.
REVENUE RECOGNITION: Service revenues consist primarily of fees for
preparation of tax returns, participations in refund anticipation loans,
consulting services, brokerage commissions and interest earned on customer
accounts and mortgage loans. Generally, service revenues are recorded in the
period in which service is performed. Commissions revenue is recognized on a
trade-date basis. Revenues for services rendered in connection with the
Company's Business services segment are recognized on a time and materials
basis.
Product sales consist primarily of gains on sales of mortgage loans. Gains
on loan sales are recognized in accordance with Statement of Financial
Accounting Standards No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," utilizing the
financial-components approach which focuses on control of assets and liabilities
being transferred.
The Company records franchise royalties, based upon the contractual
percentages of franchise revenues, in the period in which the franchise provides
the service.
ONE TO ONE | H&R BLOCK | 2001 39
<PAGE> 20
ADVERTISING EXPENSE: The Company expenses advertising costs the first time
the advertising takes place.
TAXES ON EARNINGS: The Company and its subsidiaries file a consolidated
Federal income tax return on a calendar year basis. Therefore, the current
liability for taxes on earnings recorded in the balance sheet at each year-end
consists principally of taxes on earnings for the period January 1 to April 30
of the respective year. Deferred taxes are provided for temporary differences
between financial and tax reporting, which consist principally of residual
interests, accrued expenses, deferred compensation, mortgage servicing rights
and allowances for credit losses.
The Company has a Tax Sharing Agreement with its former subsidiary,
CompuServe Corporation ("CompuServe"), pursuant to which CompuServe generally is
obligated to pay the Company (or the Company is obligated to pay CompuServe) for
CompuServe's liability (or tax benefits) related to Federal, state, and local
income taxes for any taxable period during which CompuServe was a subsidiary of
the Company.
DISCLOSURE REGARDING CERTAIN FINANCIAL INSTRUMENTS: The carrying values
reported in the balance sheet for cash equivalents, all receivables, notes
payable, all accounts payable, accrued liabilities and the current portion of
long-term debt approximate fair market value due to the relatively short-term
nature of the respective instruments.
STOCK COMPENSATION PLANS: The Company accounts for its stock compensation
plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"), as allowed under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123").
NEW ACCOUNTING STANDARDS: In the fourth quarter of fiscal 2001, the Company
elected the early adoption of Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
in June 2000 ("SFAS 133") and Statement of Financial Accounting Standards No.
138, "Accounting for Derivative Instruments and Certain Hedging Activities, an
amendment of FASB Statement No. 133" ("SFAS 138"). SFAS 133 and 138 establish
accounting and reporting standards for derivative and hedging activities, and
requires companies to record derivative instruments as assets or liabilities,
measured at fair value. The recognition of gains or losses resulting from
changes in the values of those derivative instruments is based on the use of
each derivative instrument and whether it qualifies for hedge accounting. The
Company has identified derivative instruments related to certain of its
commitments to originate residential mortgage loans. The Company had no embedded
derivative instruments requiring separate accounting treatment.
The Company originates residential mortgage loans with the intention of
selling these loans. These commitments to fund loans are freestanding derivative
instruments and do not qualify for hedge accounting treatment and, therefore,
the fair value adjustments are recorded in the consolidated statement of
earnings. The commitments that qualify as derivative instruments totaled
$252,593. The transition adjustment for adoption of SFAS 133 and SFAS 138 of
$4,414, net of taxes, is shown as the cumulative effect of a change in
accounting principle in the consolidated statement of earnings for the year
ended April 30, 2001. Proforma effects are not disclosed as the change affects
only the current period.
Currently, there are ongoing discussions surrounding the implementation and
interpretation of SFAS 133 by the Financial Accounting Standards Board's
Derivative Implementation Group. If the definition of derivative instruments is
altered, this change may impact the Company's transition adjustment amounts and
subsequent reported operating results.
In December 1999, the Securities and Exchange Commission ("SEC") issued SEC
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company implemented SAB 101 in the fourth quarter of fiscal 2001. The
implementation of SAB 101 has no impact on annual revenues and earnings,
however, due to the seasonal influences of the business, the implementation
resulted in a shift of revenues and earnings between the Company's third and
fourth quarters. As a result, the Company has adjusted its third quarter of
fiscal year 2001. Except for the Quarterly Financial Data, the Company has not
presented pro forma results.
In fiscal year 2001, the Company adopted Statement of Financial Accounting
Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS 140"). SFAS 140 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001 and is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
SFAS 140 is a replacement of Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125"). SFAS 140 revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain
40 ONE TO ONE | H&R BLOCK | 2001
<PAGE> 21
new disclosures, but carries over most of the SFAS 125 provisions without
reconsideration. The adoption of SFAS 140 had no effect on the consolidated
financial statements.
In July 2000, the Emerging Issues Task Force ("EITF") reached a consensus
on Issue 99-20, "Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interests in Securitized Financial Assets ("EITF 99-20"),
and subsequently clarified its consensus in September 2000, November 2000 and
January 2001. EITF 99-20 addresses how the holder of beneficial interests should
recognize cash flows on the date of the transaction and how interest income is
recognized over the life of the interests. EITF 99-20 will be effective for the
Company in the first quarter of fiscal year 2002. The Company has not yet
determined the effect of EITF 99-20 on the consolidated financial statements.
NET EARNINGS PER SHARE
Basic net earnings per share is computed using the weighted average number of
common shares outstanding. The dilutive effect of potential common shares
outstanding is included in diluted net earnings per share. The computations of
basic and diluted net earnings per share from continuing operations are as
follows (shares in thousands):
<TABLE>
<CAPTION>
Year Ended April 30 2001 2000 1999
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings from continuing operations before change
in accounting principle $276,748 $251,895 $237,795
----------------------------------
Basic weighted average shares 91,947 98,033 99,761
Effect of dilutive securities:
Common and convertible preferred stock options 620 895 1,058
Convertible preferred stock 1 1 2
----------------------------------
Dilutive potential common shares 92,568 98,929 100,821
==================================
Net earnings per share from continuing operations:
Basic $ 3.01 $ 2.57 $ 2.38
Diluted 2.99 2.55 2.36
--------------------------------------------------------------------------------------------
</TABLE>
Diluted net earnings per share excludes the impact of weighted average
shares issuable upon the exercise of stock options of 6,953,301, 3,039,195 and
149,370 shares for 2001, 2000 and 1999, respectively, because the options'
exercise prices were greater than the average market price of the common shares
and therefore, the effect would be antidilutive.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents is comprised of the following:
<Table>
<CAPTION>
April 30 2001 2000
-------------------------------------------------------------------------------
<S> <C> <C>
Cash and interest-bearing deposits $218,876 $162,363
Other interest-bearing securities 42,007 183,144
Securities purchased under agreements to resell 9,000 32,000
Certificates of deposit 1,930 2,394
---------------------
$271,813 $379,901
----------------------------------------------------------=====================
</Table>
ONE TO ONE | H&R BLOCK | 2001 41
<PAGE> 22
MARKETABLE SECURITIES - AVAILABLE-FOR-SALE
The amortized cost and market value of marketable securities classified as
available-for-sale at April 30, 2001 and 2000 are summarized below:
<TABLE>
<CAPTION>
2001 2000
---------------------------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current:
Municipal bonds and notes $ 8,260 $ 6 $ - $ 8,266 $ 17,021 $ - $ 55 $ 16,966
-------------------------------------------------------------------------------------------------
8,260 6 - 8,266 17,021 - 55 16,966
-------------------------------------------------------------------------------------------------
Noncurrent:
Residual interests 243,840 7,571 12,811 238,600 182,629 4,486 1,169 185,946
Municipal bonds 26,654 352 58 26,948 49,566 2 645 48,923
Common stock 4,946 500 835 4,611 4,025 571 168 4,428
-------------------------------------------------------------------------------------------------
275,440 8,423 13,704 270,159 236,220 5,059 1,982 239,297
-------------------------------------------------------------------------------------------------
$ 283,700 $ 8,429 $ 13,704 $ 278,425 $ 253,241 $ 5,059 $ 2,037 $ 256,263
--------------------------------=================================================================================================
</TABLE>
Proceeds from the sales of available-for-sale securities were $356,192,
$211,836 and $522,252 during 2001, 2000 and 1999, respectively. Gross realized
gains on those sales during 2001, 2000 and 1999 were $17,936, $12,177 and
$4,711, respectively; gross realized losses were $192, $480 and $587,
respectively.
Contractual maturities of available-for-sale debt securities at April 30,
2001 are presented below. Since expected maturities differ from contractual
maturities due to the issuers' rights to prepay certain obligations or the
seller's rights to call certain obligations, the first call date, put date or
auction date for municipal bonds and notes is considered the contractual
maturity date.
<Table>
<CAPTION>
Amortized Market
Cost Value
------------------------------------------------------------------------------
<S> <C> <C>
Within one year $ 8,260 $ 8,266
After one year through five years 15,294 15,404
After five years through 10 years 11,360 11,544
----------------------
$ 34,914 $ 35,214
--------------------------------------------------------======================
</Table>
RETAINED INTERESTS
Beginning in April 2000, the Company entered into off-balance sheet arrangements
under which the Company originates mortgage loans and sells the mortgage loans
the same day the loans are funded in a whole-loan sale to a third-party trust.
Under these arrangements, the Company retains a receivable from the trust that
is then pledged to a qualified special purpose entity who securitizes the
related mortgage loans. The Company then retains a residual interest in these
securitized loans that is classified as either an available-for-sale security or
a trading security depending on certain criteria as established by the Company.
The Company then securitizes these residual interests in net interest margin
("NIM") transactions. The Company securitized $380,267 of these residual
interests in NIM transactions. The receivable from the whole-loan sales of
$66,587 and the pledge of this receivable of $14,206, were treated as a noncash
investing activities in the consolidated statement of cash flows for the year
ended April 30, 2001. The Company received proceeds from NIM securitizations of
$319,620, servicing fees of $214 and cash flows from interest-only strips of
$2,127 from the securitization trusts in fiscal 2001.
In connection with these off-balance sheet arrangements, the Company
entered into forward loan sale commitments whereby the Company was obligated to
sell, during fiscal 2001, a minimum of $2,000,000 and a maximum of $6,000,000 in
mortgage loans. There was no commitment fee and the commitments are renewable
annually. For fiscal 2002, the forward loan sale commitments were not renewed.
The Company securitized $3,767,010 in mortgage loans during the year ended
April 30, 2000, resulting in residual interests with an allocated
42 ONE TO ONE | H&R BLOCK | 2001
<PAGE> 23
carrying value if $245,801. The Company securitized $248,555 of residual
interests through NIM transactions. The remaining residual interests from the
securitizations during 2000 of $28,042 were treated as noncash investing
activities in the consolidated statement of cash flows for the year ended April
30, 2000.
Included in investments in available-for-sale marketable securities as of
April 30, 2001 and April 30, 2000 are residual interests in securitizations. The
Company estimates future cash flows from these residuals and values them
utilizing assumptions that it believes are consistent with those that would be
utilized by an unaffiliated third-party purchaser.
The fair value of residuals are determined by computing the present value
of the excess of the weighted average coupon on the loans sold over the sum of
(1) the coupon on the senior interests, (2) a base servicing fee paid to the
servicer of the loans (which is usually the Company), (3) expected losses to be
incurred on the portfolio of the loans sold (as projected to occur) over the
lives of the loans, (4) fees payable to the trustee and insurer, (5) estimated
collections of prepayment penalty fees, and (6) other fees. Prepayment and loss
assumptions used in estimating the cash flows are based on evaluation of the
actual experience of the Company's servicing portfolio or on market rates on new
portfolios, taking into consideration the current and expected interest rate
environment and its expected impact on future prepayment and default rates. The
estimated cash flows expected to be received by the Company are discounted at an
interest rate the Company believes an unaffiliated third-party purchaser would
require as a rate of return on such a financial instrument. To the extent that
actual future excess cash flows are different from estimated excess cash flows,
the fair value of the Company's residual could increase or decrease.
Mortgage servicing rights are included in other assets on the consolidated
balance sheet. Assumptions used in estimating the value of MSRs includes market
discount rates and anticipated prepayment speeds. The prepayment speeds are
estimated using the Company's historical experience and third party market
sources for fixed-rated mortgages with similar coupons and prepayment reports
for comparable adjustable rate mortgage loans. The key assumptions the Company
utilizes to estimate the cash flows of the residual interests and MSRs are as
follows:
<Table>
<CAPTION>
---------------------------------------------------------
<S> <C>
Estimated annual prepayments 23% to 75%
Estimated annual credit losses .5% to 3.5%
Discount rate - residual interests 12% to 20%
Discount rate - MSRs 12.8%
---------------------------------------------------------
</Table>
The fair value of the residuals at April 30, 2001 and April 30, 2000 were
$238,600 and $185,946, respectively. The fair value of MSRs at April 30, 2001
and April 30, 2000 were $61,796 and $42,282, respectively. Additions to and
amortization of MSRs for 2001 were $37,661 and $18,147, respectively. At April
30, 2001, the sensitivity of the current fair value of the residuals and MSRs to
10% and 20% adverse changes in the above key assumptions are as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
Residential Mortgage Loans
Fixed-Rate Adjustable NIMs Servicing Assets
------------------------------------------------------
<S> <C> <C> <C> <C>
Carrying amount/fair value $ 31,635 $ 46,843 $ 160,122 $ 61,796
Weighted average life (in years) 7.8 5.5 3.9 2.5
Annual prepayments:
Adverse 10% - $ impact on fair value $ (1,026) $ (1,350) $ (21,911) $ (6,916)
Adverse 20% - $ impact on fair value (1,824) (2,326) (37,947) (15,172)
Annual credit losses:
Adverse 10% - $ impact on fair value $ (686) $ (792) $ (19,168) Not applicable
Adverse 20% - $ impact on fair value (1,451) (1,508) (37,004) Not applicable
Discount rate:
Adverse 10% - $ impact on fair value $ (1,052) $ (1,703) $ (7,603) $ (1,422)
Adverse 20% - $ impact on fair value (2,039) (3,314) (14,749) (2,776)
Variable interest rates:
Adverse 10% - $ impact on fair value $ (127) $ 22 $ (43,838) $ (6)
Adverse 20% - $ impact on fair value (114) (8) (85,925) (12)
--------------------------------------------------------------------------------------------------
</TABLE>
ONE TO ONE | H&R BLOCK | 2001 43
<PAGE> 24
These sensitivities are hypothetical and should be used with caution. As
the figures indicate, changes in fair value based on a 10% variation in
assumptions generally cannot be extrapolated because the relationship of the
change in assumption to the change in fair value may not be linear. Also in this
table, the effect of a variation of a particular assumption on the fair value of
the retained interest is calculated without changing any other assumptions; in
reality, changes in one factor may result in changes in another, which might
magnify or counteract the sensitivities.
RECEIVABLES
Receivables consist of the following:
<Table>
<CAPTION>
April 30 2001 2000
------------------------------------------------------------------------------
<S> <C> <C>
Business services accounts receivable $ 188,041 $ 148,109
Mortgage loans held for sale 80,925 163,033
Participation in refund anticipation loans 38,824 47,581
Software receivables 33,456 31,721
Loans to franchises 28,716 24,888
Other 50,386 68,992
-----------------------
420,348 484,324
Allowance for doubtful accounts 47,125 49,602
-----------------------
$ 373,223 $ 434,722
-------------------------------------------------------=======================
</Table>
EXCESS OF COST OVER FAIR VALUE OF NET TANGIBLE ASSETS ACQUIRED
Excess of cost over fair value of net tangible assets acquired consists of the
following:
<Table>
<CAPTION>
April 30 2001 2000
------------------------------------------------------------------------------
<S> <C> <C>
Goodwill $ 667,608 $ 636,350
Customer relationships 397,049 387,775
Assembled workforce 116,312 104,044
Trade names 55,638 55,638
Management infrastructure 29,147 29,147
Noncompete agreements 17,769 12,425
-----------------------
1,283,523 1,225,379
Less accumulated amortization 231,697 130,305
-----------------------
$1,051,826 $1,095,074
-------------------------------------------------------=======================
</Table>
Amortization expense for 2001, 2000 and 1999 amounted to $104,276,
$66,346, and $24,378, respectively.
PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<Table>
<CAPTION>
April 30 2001 2000
------------------------------------------------------------------------------
<S> <C> <C>
Land $ 42,420 $ 42,338
Buildings 83,855 74,260
Computers and other equipment 338,271 290,386
Capitalized software 67,636 50,655
Leasehold improvements 80,952 67,827
-----------------------
613,134 525,466
Less accumulated depreciation and amortization 324,287 225,967
-----------------------
$ 288,847 $ 299,499
-------------------------------------------------------=======================
</Table>
44 ONE TO ONE | H&R BLOCK | 2001
<PAGE> 25
Depreciation and amortization expense for 2001, 2000 and 1999 amounted to
$101,332, $80,872 and $50,227, respectively. The Company has property and
equipment with a cost of $45,913 under capital lease. The Company has an
agreement to lease real estate and buildings under a noncancelable capital lease
for the next 19 years with an option to purchase after six years. The real
estate, building and long-term debt of $14,075 related to this lease was treated
as a noncash investing activity on the consolidated statement of cash flows for
the year ended on April 30, 2000.
LONG-TERM DEBT
On April 13, 2000, the Company issued $500,000 of 8 1/2 % Senior Notes under a
shelf registration statement. The Senior Notes are due April 15, 2007, and are
not redeemable prior to maturity. The net proceeds of this transaction were used
to repay a portion of the short-term borrowings which initially funded the
acquisition of OLDE Financial Corporation and Financial Marketing Services, Inc.
(collectively, "OLDE").
On October 21, 1997, the Company issued $250,000 of 6 3/4 % Senior Notes
under a shelf registration statement. The Senior Notes are due November 1, 2004,
and are not redeemable prior to maturity. The net proceeds of this transaction
were used to repay short-term borrowings which initially funded the acquisition
of Option One Mortgage Corporation ("Option One").
The Company had obligations related to acquisitions of accounting firms of
$154,110 and $169,103 at April 30, 2001 and 2000, respectively. The current
portion of these amounts is included in the current portion of long-term debt on
the consolidated balance sheet. The long-term portions are due from August 2002
to January 2006.
The Company had mortgage notes and capitalized lease obligations of $22,377
at April 30, 2001 that are collateralized by land, buildings and equipment. The
obligations are due at varying dates for up to 19 years.
The aggregate payments required to retire long-term debt are $51,763,
$44,470, $40,360, $265,788, $12,361 and $507,995 in 2002, 2003, 2004, 2005, 2006
and beyond, respectively.
Based upon borrowing rates currently available to the Company for
indebtedness with similar terms, the fair value of the long-term debt was
approximately $907,115 and $896,894 at April 30, 2001 and 2000, respectively.
OTHER NONCURRENT LIABILITIES
The Company has deferred compensation plans which permit directors and certain
employees to defer portions of their compensation and accrue earnings on the
deferred amounts. The compensation, together with Company matching of deferred
amounts, has been accrued, and the only expenses related to these plans are the
Company match and the earnings on the deferred amounts which are not material to
the financial statements. Included in other noncurrent liabilities are $44,490
and $39,862 at April 30, 2001 and 2000, respectively, to reflect the liability
under these plans. The Company purchases whole-life insurance contracts on
certain related directors and employees to recover distributions made or to be
made under the plans and records the cash surrender value of the policies in
other assets. If all the assumptions regarding mortality, earnings, policy
dividends and other factors are realized, the Company will ultimately realize
its investment plus a factor for the use of its money.
In connection with the Company's acquisition of the non-attest assets of
McGladrey & Pullen, LLP ("McGladrey") in August 1999, the Company assumed
certain pension liabilities related to McGladrey's retired partners. The Company
makes payments in varying amounts on a monthly basis. Included in other
noncurrent liabilities at April 30, 2001 and 2000 are $31,360 and $36,128,
respectively, related to this liability.
STOCKHOLDERS' EQUITY
The Company is authorized to issue 6,000,000 shares of Preferred Stock, without
par value. At April 30, 2001, the Company had 5,560,833 shares of authorized but
unissued Preferred Stock. Of the unissued shares, 600,000 shares have been
designated as Participating Preferred Stock in connection with the Company's
shareholder rights plan.
On March 8, 1995, the Board of Directors authorized the issuance of a
series of 500,000 shares of nonvoting Preferred Stock designated as Convertible
Preferred Stock, without par value. In April 1995, 401,768 shares of Convertible
Preferred Stock were issued in connection with an acquisition. In addition,
options to purchase 51,828 shares of Convertible Preferred Stock were issued as
a part of the acquisition and 37,399 shares of Convertible Preferred Stock were
issued in connection with these options. Each share of Convertible Preferred
Stock became convertible on April 5, 1998 into four shares of Common Stock of
the Company, subject to adjustment upon certain events. The holders of the
Convertible
ONE TO ONE | H&R BLOCK | 2001 45
<PAGE> 26
Preferred Stock are not entitled to receive dividends paid in cash, property or
securities and, in the event of any dissolution, liquidation or winding-up of
the Company, will share ratably with the holders of Common Stock then
outstanding in the assets of the Company after any distribution or payments are
made to the holders of Participating Preferred Stock or the holders of any other
class or series of stock of the Company with preference over the Common Stock.
COMPREHENSIVE INCOME
The Company's comprehensive income is comprised of net earnings, foreign
currency translation adjustments and the change in the net unrealized gain or
loss on available-for-sale marketable securities. Included in stockholders'
equity at April 30, 2001 and 2000, the net unrealized holding gain (loss) on
available-for-sale securities was $(2,088) and $2,574, respectively, and the
foreign currency translation adjustment was $(40,679) and $(28,815),
respectively.
<TABLE>
<CAPTION>
Year Ended April 30 2001 2000 1999
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings $ 281,162 $ 251,895 $ 215,366
Unrealized gains on securities (less applicable taxes (benefit)
of ($3,307), ($124) and $1,619):
Unrealized holding gains (losses) arising during period
(less applicable taxes of $4,057, $4,426, and $3,186) 5,718 6,953 5,199
Less: Reclassification adjustment for gains included in
earnings (less applicable taxes of $7,364, $4,550, and $1,567) (10,380) (7,147) (2,557)
Foreign currency translation adjustments (11,864) (2,647) (1,525)
-----------------------------------
Comprehensive income $ 264,636 $ 249,054 $ 216,483
---------------------------------------------------------------------===================================
</Table>
STOCK COMPENSATION PLANS
The Company has four stock compensation plans: the 1993 Long-Term Executive
Compensation Plan, the 1989 Stock Option Plan for Outside Directors, the 1999
Stock Option Plan for Seasonal Employees, and the 2000 Employee Stock Purchase
Plan ("ESPP").
The 1993 plan was approved by the shareholders in September 1993 to replace
the 1984 Long-Term Executive Compensation Plan, which terminated at that time
except with respect to outstanding awards thereunder. Under the 1993 and 1989
plans, options may be granted to selected employees and outside directors to
purchase the Company's Common Stock for periods not exceeding 10 years at a
price that is not less than 100% of fair market value on the date of the grant.
The options are exercisable either (1) starting one year after the date of the
grant, (2) starting one year or three years after the date of the grant on a
cumulative basis at the annual rate of 33 1/3% of the total number of option
shares, or (3) starting three years after the date of the grant on a cumulative
basis at the rate of 40%, 30%, and 30% over the following three years. In
addition, certain option grants have accelerated vesting provisions based on the
Company's stock price reaching specified levels.
The 1999 Stock Option Plan for Seasonal Employees provided for the grant of
options on June 30, 2000, 1999 and 1998 at the market price on the date of the
grant. The options are exercisable during September through November in each of
the two years following the calendar year of the grant.
Changes during the years ended April 30, 2001, 2000 and 1999 under the
stock option plans were as follows:
<TABLE>
<CAPTION>
2001 2000 1999
----------------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year 8,440,614 $ 44.22 5,726,494 $ 38.03 5,110,392 $ 32.71
Options granted 4,305,517 32.51 5,059,802 50.16 4,127,742 42.20
Options exercised (510,458) 34.07 (1,032,251) 36.12 (2,196,673) 32.67
Options which expired (2,781,642) 39.55 (1,313,431) 46.50 (1,314,967) 39.40
Options outstanding, end of year 9,454,031 40.80 8,440,614 44.22 5,726,494 38.03
Shares exercisable, end of year 4,336,857 42.33 5,206,457 42.70 3,505,737 37.62
Shares reserved for future grants, end of year 8,055,518 11,037,281 2,966,135
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
46 ONE TO ONE | H&R BLOCK | 2001
<PAGE> 27
A summary of stock options outstanding and exercisable at April 30, 2001
follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
Outstanding Exercisable
----------------------------------------------- ----------------------------
Number Weighted-Average Weighted- Number Weighted-
Outstanding Remaining Average Exercisable Average
Range of Exercise Prices at April 30 Contractual Life Exercise Price at April 30 Exercise Price
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$19.9375 - 28.75 265,684 6 years $ 27.62 265,684 $ 27.62
$30.6875 - 36.875 4,102,382 6 years 32.49 1,145,905 32.57
$37.00 - 44.625 1,508,298 8 years 41.92 869,267 41.62
$45.00 - 52.00 2,998,667 4 years 49.92 2,056,001 49.97
$55.0625 - 55.625 579,000 9 years 55.62 - -
------------------------------------------------------------------------------
9,454,031 4,336,857
------------------------------==============================================================================
</TABLE>
The 2000 ESPP provides the option to purchase shares of the Company's
Common Stock through payroll deductions to a majority of the employees of
subsidiaries of the Company. The purchase price of the stock is 90% of the lower
of either the fair market value of the Company's Common Stock on the first
trading day within the Option Period or on the last trading day within the
Option Period. The Option Periods are six-month periods beginning January 1 and
July 1 each year. During fiscal 2001, 27,345 shares were purchased under the
ESPP out of a total authorized 3,000,000 shares.
The Company applies APB 25 in accounting for its stock compensation plans,
under which no compensation cost has been recognized. Had compensation cost for
the stock compensation plans been determined in accordance with the fair value
accounting method prescribed under SFAS 123, the Company's net earnings and net
earnings per share would have been as follows:
<Table>
<CAPTION>
Year Ended April 30 2001 2000 1999
------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings:
As reported $ 281,162 $ 251,895 $ 215,366
Pro forma 262,701 237,544 202,421
Basic net earnings per share:
As reported $ 3.06 $ 2.57 $ 2.16
Pro forma 2.86 2.42 2.03
Diluted net earnings per share:
As reported $ 3.04 $ 2.55 $ 2.14
Pro forma 2.85 2.41 2.01
------------------------------------------------------------------------------
</Table>
For the purposes of computing the pro forma effects of stock compensation
plans under the fair value accounting method, the fair value of each stock
option grant or purchase right grant was estimated on the date of the grant
using the Black-Scholes option pricing model. The weighted-average fair value of
stock options granted during 2001, 2000 and 1999 was $9.34, $9.09 and $5.84,
respectively. The weighted-average fair value of purchase rights granted during
2001 was $4.58, using the following weighted-average assumptions: expected life
of four months, volatility of 26.37%, dividend yield of 3.38% and risk-free
interest rate of 6.05%. The following weighted-average assumptions were used for
stock option grants during the following periods:
<Table>
<CAPTION>
Year Ended April 30 2001 2000 1999
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 6.25% 5.75% 5.41%
Expected life 3 years 3 years 3 years
Expected volatility 61.21% 30.67% 21.86%
Dividend yield 3.39% 2.20% 2.36%
-------------------------------------------------------------------------------
</Table>
ONE TO ONE | H&R BLOCK | 2001 47
<PAGE> 28
SHAREHOLDER RIGHTS PLAN
On July 25, 1998, the rights under the July 1988 shareholder rights plan, as
amended, expired and the rights under a shareholder rights plan adopted by the
Company's Board of Directors on March 25, 1998 became effective. Like the 1988
plan, the 1998 plan was adopted to deter coercive or unfair takeover tactics and
to prevent a potential acquirer from gaining control of the Company without
offering a fair price to all of the Company's stockholders. Under the 1998 plan,
a dividend of one right (a "Right") per share was declared and paid on each
share of the Company's Common Stock outstanding on July 25, 1998. Rights
automatically attach to shares issued after such date.
Under the 1998 plan, a Right becomes exercisable when a person or group of
persons acquires beneficial ownership of 15% or more of the outstanding shares
of the Company's Common Stock without the prior written approval of the
Company's Board of Directors (an "Unapproved Stock Acquisition"), and at the
close of business on the tenth business day following the commencement of, or
the public announcement of an intent to commence, a tender offer that would
result in an Unapproved Stock Acquisition. The Company may, prior to any
Unapproved Stock Acquisition, amend the plan to lower such 15% threshold to not
less than the greater of (1) any percentage greater than the largest percentage
of beneficial ownership by any person or group of persons then known by the
Company, and (2) 10% (in which case the acquisition of such lower percentage of
beneficial ownership then constitutes an Unapproved Stock Acquisition and the
Rights become exercisable). As adjusted in connection with the two-for-one stock
split effective on August 1, 2001, when exercisable, the registered holder of
each Right may purchase from the Company one two-hundredth of a share of a class
of the Company's Participating Preferred Stock, without par value, at a price of
$107.50, subject to adjustment. The registered holder of each Right then also
has the right (the "Subscription Right") to purchase for the exercise price of
the Right, in lieu of shares of Participating Preferred Stock, a number of
shares of the Company's Common Stock having a market value equal to twice the
exercise price of the Right. Following an Unapproved Stock Acquisition, if the
Company is involved in a merger, or 50% or more of the Company's assets or
earning power are sold, the registered holder of each Right has the right (the
"Merger Right") to purchase for the exercise price of the Right a number of
shares of the common stock of the surviving or purchasing company having a
market value equal to twice the exercise price of the Right.
After an Unapproved Stock Acquisition, but before any person or group of
persons acquires 50% or more of the outstanding shares of the Company's Common
Stock, the Board of Directors may exchange all or part of the then outstanding
and exercisable Rights for Common Stock at an exchange ratio of one share of
Common Stock per Right (the "Exchange"). Upon any such Exchange, the right of
any holder to exercise a Right terminates. Upon the occurrence of any of the
events giving rise to the exercisability of the Subscription Right or the Merger
Right or the ability of the Board of Directors to effect the Exchange, the
Rights held by the acquiring person or group under the new plan will become void
as they relate to the Subscription Right, the Merger Right or the Exchange.
The Company may redeem the Rights under the 1998 plan at a price of
$.000625 per Right at any time prior to the earlier of (i) an Unapproved Stock
Acquisition, or (ii) the expiration of the rights. The Rights under the new plan
will expire on March 25, 2008, unless extended by the Board of Directors. Until
a Right is exercised, the holder thereof, as such, will have no rights as a
stockholder of the Company, including the right to vote or to receive dividends.
The issuance of the Rights alone has no dilutive effect and does not affect
reported net earnings per share.
OTHER EXPENSES
Included in other expenses are the following:
<Table>
<CAPTION>
Year Ended April 30 2001 2000 1999
------------------------------------------------------------------------------
<S> <C> <C> <C>
Legal and professional $ 76,232 $ 47,934 $ 13,164
Purchased services 55,985 33,347 19,466
Loan servicing 29,396 15,821 11,158
Refund anticipation loan servicing fees 27,315 28,820 15,028
Travel and entertainment 26,668 26,695 15,094
Taxes and licenses 13,250 17,469 14,531
Brokerage commissions and trading fees 11,516 15,639 3,137
------------------------------------------------------------------------------
</Table>
48 ONE TO ONE | H&R BLOCK | 2001
<PAGE> 29
TAXES ON EARNINGS
The components of earnings from continuing operations before income taxes upon
which Federal and foreign income taxes have been provided are as follows:
<Table>
<CAPTION>
Year Ended April 30 2001 2000 1999
------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $ 466,437 $ 408,024 $ 381,443
Foreign 6,641 4,242 2,098
-----------------------------------
$ 473,078 $ 412,266 $ 383,541
-------------------------------------------===================================
</Table>
Deferred income tax provisions (benefits) reflect the impact of temporary
differences between amounts of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws. The current and deferred
components of taxes on earnings from continuing operations are comprised of the
following:
<Table>
<CAPTION>
Year Ended April 30 2001 2000 1999
------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 204,060 $ 163,535 $ 123,035
State 27,701 23,036 16,128
Foreign 3,439 3,898 1,553
-----------------------------------
235,200 190,469 140,716
-----------------------------------
Deferred:
Federal (33,724) (24,412) 5,114
State (4,578) (3,438) 670
Foreign (568) (2,248) (754)
-----------------------------------
(38,870) (30,098) 5,030
-----------------------------------
$ 196,330 $ 160,371 $ 145,746
-------------------------------------------===================================
</Table>
Provision is not made for possible income taxes payable upon distribution
of unremitted earnings of foreign subsidiaries. Such unremitted earnings
aggregated $65,229 at December 31, 2000. Management intends to reinvest any
foreign earnings, therefore, a provision has not been made for income taxes
payable upon remittance of such earnings, as management believes the amount
would be immaterial.
The following table reconciles the U.S. Federal income tax rate to the
Company's effective tax rate:
<Table>
<CAPTION>
Year Ended April 30 2001 2000 1999
------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
-----------------------------------
Increases (reductions) in income
taxes resulting from:
State income taxes, net of Federal
income tax benefit 3.2% 3.1% 2.9%
Foreign income taxes, net of Federal
income tax benefit 0.1% 0.1% 0.2%
Amortization of intangibles 3.6% 2.6% 0.3%
Nontaxable Federal income (0.3%) (0.3%) (0.7%)
Other (0.1%) (1.6%) 0.3%
-----------------------------------
Effective rate 41.5% 38.9% 38.0%
-------------------------------------------===================================
</Table>
ONE TO ONE | H&R BLOCK | 2001 49
<PAGE> 30
A summary of deferred taxes follows:
<Table>
<CAPTION>
April 30 2001 2000
-----------------------------------------------------------------
<S> <C> <C>
Gross deferred tax assets:
Accrued expenses $ (31,923) $ (17,729)
Allowance for credit losses (18,406) (8,800)
-----------------------
Current (50,329) (26,529)
-----------------------
Residual interest income (42,048) (22,193)
Deferred compensation (20,439) (18,509)
Depreciation (8,128) (12,879)
Amortization of intangibles (3,258) -
-----------------------
Noncurrent (73,873) (53,581)
-----------------------
Gross deferred tax liabilities:
Mark-to-market adjustments 3,886 8,437
Accrued income 964 198
-----------------------
Current 4,850 8,635
-----------------------
Mortgage servicing rights 22,944 12,608
Depreciation - 1,329
-----------------------
Noncurrent 22,944 13,937
-----------------------
Net deferred tax assets $ (96,408) $ (57,538)
------------------------------------------=======================
</Table>
ACQUISITIONS
During fiscal year 2001, the Company acquired several accounting firms. The
purchased prices aggregated $54,443. Each acquisition was accounted for as a
purchase and, accordingly, results for each acquisition are included since the
date of acquisition. The excess of cost over fair value of net tangible assets
acquired was $54,322 and is being amortized on a straight-line basis over
periods up to 20 years.
On December 1, 1999, the Company completed the purchase of all the issued
and outstanding shares of capital stock of OLDE for $850,000 in cash plus net
tangible book value payments of $48,472. The purchase agreement also provides
for possible future consideration payable for up to five years after the
acquisition based upon revenues generated from certain online brokerage services
and such consideration will be treated as purchase price when paid. The
transaction was accounted for as a purchase and, accordingly, OLDE's results are
included since the date of acquisition. Liabilities assumed of $1,774,156 were
treated as a noncash investing activity in the consolidated statement of cash
flows for the year ended April 30, 2000. The excess of cost over fair value of
net tangible assets acquired was $471,133 at April 30, 2000. Such is being
amortized on a straight-line basis over periods up to 20 years. The acquisition
was initially financed with short-term borrowings and a portion of these
borrowings were repaid with the issuance of $500,000 in Senior Notes in the
fourth quarter of fiscal 2000.
The following unaudited pro forma summary combines the consolidated results
of operations of the Company and OLDE as if the acquisition had occurred on May
1, 1999 and 1998, after giving effect to certain adjustments, including
amortization of intangible assets, increased interest expense on the acquisition
debt and the related income tax effects. The pro forma information is presented
for informational purposes only and is not necessarily indicative of what would
have occurred if the acquisition had been made as of those dates. In addition,
the pro forma information is not intended to be a projection of future results.
<Table>
<CAPTION>
April 30 (unaudited) 2000 1999
-----------------------------------------------------------------
<S> <C> <C>
Revenues $2,678,022 $ 2,007,422
Net earnings 218,275 172,566
Basic net earnings per share $ 2.23 $ 1.73
Diluted net earnings per share 2.21 1.71
-----------------------------------------------------------------
</Table>
50 ONE TO ONE | H&R BLOCK | 2001
<PAGE> 31
On August 2, 1999, the Company, through a subsidiary, RSM McGladrey, Inc.
("RSM McGladrey"), completed the purchase of substantially all of the non-attest
assets of McGladrey & Pullen, LLP. The purchase price was $240,000 in cash
payments over four years and the assumption of certain pension liabilities with
a present value, at the date of acquisition, of $52,728. The purchase agreement
also provides for possible future contingent consideration based on a
calculation of earnings in year two, three and four after the acquisition and
such consideration will be treated as purchase price when paid. In addition, the
Company made cash payments of $65,453 for outstanding accounts receivable and
work-in-process that have been repaid to the Company as RSM McGladrey collected
these amounts in the ordinary course of business. The acquisition was accounted
for as a purchase, and accordingly, RSM McGladrey's results are included since
the date of acquisition. The present value of the additional cash payments due
over four years, the present value of the pension liability and other
liabilities assumed of $206,784, were treated as noncash investing activities in
the consolidated statement of cash flows for the year ended April 30, 2000. The
excess of cost over the fair value of net tangible assets acquired was $242,266
and is being amortized on a straight-line basis over periods up to 20 years.
During fiscal year 2000, the Company acquired several accounting firms. The
purchase prices aggregated $18,494. Each acquisition was accounted for as a
purchase and, accordingly, results for each acquisition are included since the
date of acquisition. The excess of cost over fair value of net tangible assets
acquired was $17,914 and is being amortized on a straight-line basis over
periods up to 20 years.
On October 7, 1999, the Company acquired one of its major tax franchises.
The Company issued 475,443 shares of its common stock from treasury, with a
value of $21,000, for the purchase. The acquisition was accounted for as a
purchase and, accordingly, its results are included since the date of
acquisition. The issuance of Common Stock was treated as a noncash investing
activity in the consolidated statement of cash flows for the year ended April
30, 2000. The excess of cost over fair value of net tangible assets acquired was
$34,919 and is being amortized on a straight-line basis over 15 years.
During fiscal year 1999, the Company acquired six regional accounting firms
and several smaller market firms. The purchase prices aggregated $102,285. Each
acquisition was accounted for as a purchase and, accordingly, results for each
acquisition are included since the date of acquisition. The excess of cost over
fair value of net tangible assets acquired was $98,012 and is being amortized on
a straight-line basis over periods up to 20 years.
On March 5, 1999, the Company acquired Assurance Mortgage Corporation of
America (now H&R Block Mortgage Corporation), a company engaged in the
origination and sale of conventional mortgage loans. The Company issued 268,325
shares of its Common Stock from treasury, with a value of $11,860, for the
purchase. The acquisition was accounted for as a purchase and, accordingly, its
results are included since the date of acquisition. The issuance of Common Stock
was treated as a noncash investing activity in the consolidated statement of
cash flows for the year ended April 30, 1999. The excess of cost over fair value
of net tangible assets acquired was $21,710 and is being amortized on a
straight-line basis over 15 years.
During fiscal 2001, 2000 and 1999, the Company made other acquisitions
which were accounted for as purchases. Their operations, which are not material,
are included in the consolidated statements of earnings since the date of
acquisition.
SALE OF SUBSIDIARIES
On December 31, 2000, the Company completed the sale of the assets of KSM
Business Services, part of the Company's Business services segment. The Company
recorded a gain before taxes of $2,040 on the transaction.
In March 2000, the Company sold certain assets related to its mortgage
operations. The Company recorded a pretax loss of $14,501 on the transaction,
included in other expenses on the consolidated statements of earnings for the
year ended April 30, 2000.
On January 29, 1999, the Company completed the sale of its credit card
portfolio. The Company recorded a $20,939 loss, net of taxes, on the
transaction. The consolidated statements of earnings reflect the Company's
Credit card operations segment as discontinued operations. Revenues from
discontinued operations for the year ended April 30, 1999 were $24,143.
COMMITMENTS AND CONTINGENCIES
Substantially all of the operations of the Company's subsidiaries are conducted
in leased premises. Most of the operating leases are for a one-year period with
renewal options of one to three years and provide for fixed monthly rentals.
Lease commitments at April 30, 2001, for fiscal 2002, 2003, 2004, 2005 and 2006
aggregated $148,915, $103,153, $65,114, $29,073 and $13,074, respectively, with
no significant commitments
ONE TO ONE | H&R BLOCK | 2001 51
<PAGE> 32
extending beyond that period of time. The Company's rent expense for the years
2001, 2000 and 1999 aggregated $156,325, $135,823 and $99,654, respectively.
Prior to March 31, 1999, the Company was obligated to purchase 60% of the
mortgage loan volume which met certain criteria as established by the Company
from a 40%-owned affiliate. The Company obtained majority ownership of this
affiliate on March 31, 1999. From May 1, 1998 to March 31, 1999 the Company had
purchased $312,173 of such loans.
The Company has commitments to fund mortgage loans to customers as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses. The
commitments to fund loans amounted to $1,518,456 and $546,473 at April 30, 2001
and 2000, respectively. External market forces impact the probability of
commitments being exercised, and therefore, total commitments outstanding do not
necessarily represent future cash requirements.
At April 30, 2001, the Company maintained a $1,860,000 backup credit
facility to support various financial activities conducted by its subsidiaries
through a commercial paper program. The annual commitment fee required to
support the availability of this facility is nine and one-half basis points per
annum on the unused portion of the facility. Among other provisions, the credit
agreement limits the Company's indebtedness.
The Company maintains a revolving credit facility in Canada to support a
commercial paper program with varying borrowing levels throughout the year,
reaching its peak during January through April for the Canadian tax season.
The Company is responsible for servicing mortgage loans for others of
$12,329,021, subservicing loans of $5,872,902, and the master servicing of
$538,169 previously securitized mortgage loans held in trust at April 30, 2001.
Fiduciary bank accounts that are maintained on behalf of investors and for
impounded collections were $279,381 at April 30, 2001. These bank accounts are
not assets of the Company and are not reflected in the accompanying consolidated
financial statements.
As of April 30, 2001, the Company had provided clearing organizations with
bank letters of credit totaling $68,000 that satisfied margin deposit
requirements of $63,812. These letters of credit are collateralized by
customers' margin securities.
The Company is required, in the event of non-delivery of customers'
securities owed to it by other broker-dealers or by its customers, to purchase
identical securities in the open market. Such purchases could result in losses
not reflected in the accompanying consolidated financial statements.
The Company monitors the credit standing of brokers and dealers and
customers with whom it does business. In addition, the Company monitors the
market value of collateral held and the market value of securities receivable
from others, and seeks to obtain additional collateral if insufficient
protection against loss exists.
The Company has commitments to fund certain attest entities, that are not
consolidated, related to accounting firms it has acquired. The Company is also
committed to loan up to $40,000 to McGladrey & Pullen, LLP on a revolving basis
through July 31, 2004, subject to certain termination clauses. This revolving
facility bears interest at prime rate plus four and one-half percent on the
outstanding amount and a commitment fee of one-half percent per annum on the
unused portion of the commitment.
The Company is involved in various legal proceedings which are ordinary
routine litigation incident to its business, many of which are covered in whole
or in part by insurance. It is the Company's policy to accrue for amounts
related to these legal matters if it is probable that a liability has been
incurred and an amount is reasonably estimable.
Under the Company's Guarantee and Peace of Mind programs, the Company may
be liable for certain interest, penalties and/or additional taxes due. The
Company is effectively self-insured related to these risks and claims made in
excess of self-insurance levels are fully insured by a third-party carrier.
At April 30, 2001 the Company has provided for the settlement of a class
action lawsuit involving the Company's broker-dealer. In the settlement
agreement, the Company admits to no wrongdoing.
In the regular course of business, the Company is subject to routine
examinations by Federal, state and local taxing authorities. In management's
opinion, the disposition of matters raised by such taxing authorities, if any,
in such tax examinations would not have a material adverse impact on the
Company's consolidated financial position or results of operations.
CompuServe, certain current and former officers and directors of CompuServe
and the Company were named as defendants in six lawsuits
52 ONE TO ONE | H&R BLOCK | 2001
<PAGE> 33
pending before the state and Federal courts in Columbus, Ohio. All suits alleged
similar violations of the Securities Act of 1933 based on assertions of
omissions and misstatements of fact in connection with CompuServe's public
filings related to its initial public offering in April 1996. One state lawsuit
brought by the Florida State Board of Administration also alleged certain oral
omissions and misstatements in connection with such offering. Relief sought in
the lawsuits was unspecified, but included pleas for rescission and damages.
In July 2000, the class representatives and the defendants in the class
action pending in state court, by their authorized counsel, entered into a
Stipulation of Settlement, pursuant to which the defendants were required to pay
a gross settlement amount of $9,500 in exchange for dismissal of the class
action suit and a release of all claims. The court preliminarily approved the
settlement in August 2000 and notices to the class were mailed and published.
The fairness hearing relating to the settlement was held on November 30, 2000,
and the court issued its order approving the settlement. Payment of plaintiffs'
attorneys' fees and expenses were to be paid out of the gross settlement fund.
The gross settlement fund was paid in its entirety by the Company's insurance
carrier. The Stipulation and payment of the gross settlement fund are not
admissions of the validity of any claim or any fact alleged by the plaintiffs
and defendants continue to deny any wrongdoing and any liability. The
Stipulation states that the defendants consider it desirable to settle to avoid
further expense, inconvenience, and delay, and put to rest all controversy
concerning all claims.
The Florida State Board of Administration opted out of the class action
settlement and that litigation continues separately from the state court class
action. The parties have reached a settlement that will dispose of the case in
its entirety with no material adverse impact on the Company's consolidated
financial position or results of operations.
FINANCIAL INSTRUMENTS
The Company utilizes forward contracts on FNMA mortgage-backed securities to
reduce the interest rate risk related to its fixed rate mortgage portfolio. The
position on certain or all of the fixed rate mortgages is closed, on standard
Public Securities Association ("PSA") settlement dates, when the Company enters
into a forward commitment to sell those mortgages or decides to securitize the
mortgages. These instruments are carried at market value and changes in the fair
market value are recorded in revenues on the consolidated statements of
earnings. There were no FNMA contracts at April 30, 2001.
The Company purchases these instruments from certain broker-dealer
counterparties. In the event counterparties do not fulfill their obligations,
the Company may be exposed to risk. The risk of default depends on the
creditworthiness of the counterparty. It is the Company's policy to review, as
necessary, the credit standing of each counterparty.
The Company is exposed to on-balance sheet credit risk related to its
receivables. Mortgage loans made to subprime borrowers present a higher level of
risk of default than conforming loans. These loans also involve additional
liquidity risk due to a more limited secondary market than conforming loans.
While the Company believes that the underwriting procedures and appraisal
processes it employs enable it to mitigate these risks, no assurance can be
given that such procedures or processes will be adequate protection against
these risks. The Company is exposed to off-balance sheet credit risk related to
mortgage loan receivables which the Company has committed to fund.
SUBSEQUENT EVENT (UNAUDITED)
On June 20, 2001, the Company's Board of Directors declared a two-for-one stock
split of its Common Stock in the form of a 100% stock distribution effective
August 1, 2001, to shareholders of record as of the close of business on July
10, 2001. Common Stock outstanding, giving retroactive effect to the stock split
at April 30, 2001 and 2000 would be 217,945,398 shares. Pro forma Common Stock
and retained earnings at April 30, 2001 would be $2,179 and $1,449,022,
respectively.
ONE TO ONE | H&R BLOCK | 2001 53
<PAGE> 34
Pro forma net earnings per share are as follows:
<TABLE>
<CAPTION>
Year Ended April 30 2001 2000 1999
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic net earning per share:
Net earnings from continuing operations $ 1.51 $ 1.29 $ 1.19
Net loss from discontinued operations - - (.11)
Cumulative effect of change in accounting principle .02 - -
----------------------------
Net earnings $ 1.53 $ 1.29 $ 1.08
============================
Diluted net earnings per share:
Net earnings from continuing operations $ 1.50 $ 1.27 $ 1.18
Net loss from discontinued operations - - (.11)
Cumulative effect of change in accounting principle .02 - -
----------------------------
Net earnings $ 1.52 $ 1.27 $ 1.07
------------------------------------------------------------============================
</TABLE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Fiscal 2001 Quarter Ended
April 30, Jan. 31, Oct. 31, July 31,
2001 2001 2000 2000
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $1,703,991 $ 656,000 $ 337,474 $ 304,110
--------------------------------------------------
Earnings (loss) before
income taxes (benefits) 641,635 7,792 (86,356) (89,993)
Taxes (benefits) on earnings 267,946 3,332 (36,701) (38,247)
--------------------------------------------------
Net earnings (loss) before
change in accounting 373,689 4,460 (49,655) (51,746)
Cumulative effect of change
in accounting principle 4,414 - - -
--------------------------------------------------
Net earnings (loss) $ 378,103 $ 4,460 $ (49,655) $ (51,746)
==================================================
Basic net earnings per share:
Net earnings (loss) before
change in accounting $ 4.08 $ .05 $ (.54) $ (.55)
==================================================
Net earnings (loss) $ 4.13 $ .05 $ (.54) $ (.55)
==================================================
Diluted net earnings per share:
Net earnings (loss) before
change in accounting $ 4.00 $ .05 $ (.54) $ (.55)
==================================================
Net earnings (loss) $ 4.05 $ .05 $ (.54) $ (.55)
----------------------------------==================================================
<CAPTION>
Fiscal 2000 Quarter Ended
April 30, Jan. 31, Oct. 31, July 31,
2000 2000 1999 1999
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $1,607,930 $ 512,507 $ 209,946 $ 121,560
--------------------------------------------------
Earnings (loss) before
income taxes (benefits) 557,743 (13,523) (72,157) (59,797)
Taxes (benefits) on earnings 216,962 (6,448) (27,420) (22,723)
--------------------------------------------------
Net earnings (loss) before
change in accounting 340,781 (7,075) (44,737) (37,074)
Cumulative effect of change
in accounting principle - - - -
--------------------------------------------------
Net earnings (loss) $ 340,781 $ (7,075) $ (44,737) $ (37,074)
==================================================
Basic net earnings per share:
Net earnings (loss) before
change in accounting $ 3.47 $ (.07) $ (.46) $ (.38)
==================================================
Net earnings (loss) $ 3.47 $ (.07) $ (.46) $ (.38)
==================================================
Diluted net earnings per share:
Net earnings (loss) before
change in accounting $ 3.45 $ (.07) $ (.46) $ (.38)
==================================================
Net earnings (loss) $ 3.45 $ (.07) $ (.46) $ (.38)
----------------------------------==================================================
</TABLE>
The accumulation of four quarters in fiscal 2001 and 2000 for net earnings
per share does not equal the related per share amounts for the years ended April
30, 2001 and 2000 due to the repurchase of treasury shares, the timing of the
exercise of stock options, and the antidilutive effect of stock options in the
first three quarters.
Quarterly results for the fiscal year ended April 30, 2001 in the table
above have been adjusted to reflect the implementation of SAB 101. The
cumulative effect of this change for periods prior to April 30, 2001 of
$(1,185), net of income taxes, is included in the third quarter of fiscal 2001.
There is no year-to-date effect of implementation. The effect of the
implementation of SAB 101 on third quarter revenues and net earnings before the
change in accounting principle follows:
54 ONE TO ONE | H&R BLOCK | 2001
<PAGE> 35
<Table>
<CAPTION>
SAB 101 Implementation
------------------------------
3 months ended Jan. 31, 2001
10-Q Reported Restated
-------------------------------------------------------------------------
<S> <C> <C>
Revenues $661,354 $656,000
Net earnings before change in accounting 5,645 4,460
-------------------------------------------------------------------------
</Table>
SEGMENT INFORMATION
The principal business activity of the Company's operating subsidiaries is
providing tax and financial services to the general public. Management has
determined the reportable segments identified below according to differences in
types of services, geographic locations, and how operational decisions are made.
In the third quarter of fiscal 2001, management re-evaluated its reportable
operating segments to more closely reflect how the business is now analyzed and
evaluated. As a result, the Company's Financial services segment is now
separated into Mortgage operations and Investment services. Geographical
information is presented within the segment data below. A majority of the
foreign countries in which subsidiaries of the Company operate, which are
individually immaterial, are included in International tax operations. Included
below is the financial information on each segment that is used by management to
evaluate the segment's results. The Company operates in the following reportable
segments:
U.S. TAX OPERATIONS: This segment is primarily engaged in providing tax
return preparation, filing, and related services to the general public in the
United States. Tax-related service revenues include fees from company-owned tax
offices and royalties from franchised offices. This segment participates in the
refund anticipation loan products offered by a third-party lending institution
to tax clients. This segment includes the Company's tax preparation software -
Kiplinger TaxCut(R) from H&R Block, and other personal productivity software
offered to the general public and offers online tax preparation through a tax
preparer (whereby the client fills out an online tax organizer and sends it to a
tax preparer for preparation), online do-it-yourself-tax preparation, online
professional tax review and online tax advice to the general public through the
hrblock.com website. Revenues of this segment are seasonal in nature.
INTERNATIONAL TAX OPERATIONS: This segment is primarily engaged in
providing local tax return preparation, filing, and related services to the
general public in Canada, Australia and the United Kingdom. In addition,
International tax operations has franchise offices in 9 countries that prepare
U.S. tax returns for U.S. citizens living abroad. Tax-related service revenues
include fees from company-owned tax offices and royalties from franchised
offices. Revenues of this segment are seasonal in nature.
MORTGAGE OPERATIONS: This segment is primarily engaged in the origination,
servicing, and sale of nonconforming and conforming mortgage loans to the
general public in the United States. This segment mainly offers a flexible
product line to borrowers who are creditworthy but do not meet traditional
underwriting criteria through a network of 16,453 mortgage brokers. Conforming
mortgage loan products, as well as the same flexible product line available
through brokers are offered through 22 H&R Block Financial Centers and 9 H&R
Block Mortgage Corporation retail offices.
INVESTMENT SERVICES: This segment is primarily engaged in offering full
service investment opportunities to the general public. This segment essentially
consists of H&R Block Financial Advisors, Inc. (formally OLDE Discount
Corporation), a full-service discount securities broker. Financial planning and
investment advice are offered through 105 H&R Block Financial Centers, 75 H&R
Block Financial Advisors offices and 345 tax offices, and stocks, bonds, mutual
funds and other products and securities are offered through a nationwide network
of 1,690 registered representatives, at the same locations.
BUSINESS SERVICES: This segment is primarily engaged in providing
accounting, tax and consulting services to business clients and tax, estate
planning, financial planning, wealth management and insurance services to
individuals. This segment offers services through 100 offices located throughout
the United States. Revenues of this segment are seasonal in nature.
IDENTIFIABLE ASSETS: Identifiable assets are those assets, including the
excess of cost over fair value of net tangible assets acquired, associated with
each reportable segment. The remaining assets are classified as corporate assets
and consist primarily of cash, marketable securities and corporate equipment.
ONE TO ONE | H&R BLOCK | 2001 55
<PAGE> 36
Information concerning the Company's operations by reportable segment as of and
for the years ended April 30, 2001, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
2001 2000 1999
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
U.S. tax operations $ 1,654,123 $ 1,431,085 $ 1,258,269
International tax operations 79,568 81,518 74,714
Mortgage operations 415,802 355,429 255,944
Investment services 472,425 268,376 3,989
Business services 373,820 310,867 47,341
Unallocated corporate 5,837 4,668 4,408
-----------------------------------------
Total revenues $ 3,001,575 $ 2,451,943 $ 1,644,665
=========================================
EARNINGS FROM CONTINUING OPERATIONS:
U.S. tax operations $ 433,514 $ 319,992 $ 314,113
International tax operations 7,678 4,869 2,514
Mortgage operations 139,036 88,574 62,749
Investment services 12,689 41,226 (1,623)
Business services 17,045 17,111 7,121
Unallocated corporate (37,527) (22,476) (20,729)
Interest expense on acquisition debt (98,759) (56,118) (17,757)
-----------------------------------------
473,676 393,178 346,388
Investment income, net 5,977 9,840 32,234
Intercompany interest (6,575) 9,248 4,919
-----------------------------------------
Earnings from continuing operations before
income taxes $ 473,078 $ 412,266 $ 383,541
=========================================
DEPRECIATION AND AMORTIZATION:
U.S. tax operations $ 73,604 $ 66,523 $ 49,380
International tax operations 5,011 5,494 5,741
Mortgage operations 22,715 20,311 15,764
Investment services 65,384 25,663 204
Business services 38,772 29,060 3,340
Unallocated corporate 122 167 176
-----------------------------------------
Total depreciation and amortization $ 205,608 $ 147,218 $ 74,605
=========================================
IDENTIFIABLE ASSETS:
U.S. tax operations $ 334,030 $ 348,726 $ 268,650
International tax operations 42,627 59,725 55,684
Mortgage operations 938,379 685,292 1,033,261
Investment services 2,011,517 3,678,614 5,648
Business services 575,998 517,134 146,252
Unallocated corporate 219,073 423,378 400,681
-----------------------------------------
Total assets $ 4,121,624 $ 5,712,869 $ 1,910,176
=========================================
CAPITAL EXPENDITURES:
U.S. tax operations $ 42,260 $ 95,338 $ 72,325
International tax operations 2,328 3,641 7,857
Mortgage operations 34,423 15,915 8,754
Investment services 3,557 21,582 611
Business services 9,762 9,065 1,778
Unallocated corporate 81 212 80
-----------------------------------------
Total capital expenditures $ 92,411 $ 145,753 $ 91,405
----------------------------------------------=========================================
</TABLE>
56 ONE TO ONE | H&R BLOCK | 2001
<PAGE> 37
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Block Financial Corporation ("BFC") is an indirect, wholly owned subsidiary of
the Company. BFC is the Issuer and the Company is the Guarantor of the $250,000
6 3/4 % Senior Notes issued on October 21, 1997 and of the $500,000 8 1/2 %
Senior Notes issued on April 13, 2000. The Company's guarantee is full and
unconditional. The following condensed consolidating financial statements
present separate information for BFC, for the Company and for the Company's
other subsidiaries, and should be read in conjunction with the consolidated
financial statements of the Company.
These condensed consolidating financial statements have been prepared using
the equity method of accounting. Earnings of subsidiaries are, therefore,
reflected in the Company's investment in subsidiaries account. The elimination
entries eliminate investments in subsidiaries, related stockholder's equity and
other intercompany balances and transactions.
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
Year Ended April 30, 2001
<TABLE>
<CAPTION>
H&R Block, Inc. BFC Other Consolidated
(Guarantor) (Subsidiary Issuer) Subsidiaries Eliminations H&R Block
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ - $ 1,087,471 $ 1,926,020 $ (11,916) $ 3,001,575
=======================================================================================
Expenses:
Compensation & benefits - 299,263 893,031 - 1,192,294
Occupancy & equipment - 56,093 227,088 - 283,181
Interest - 223,816 18,735 - 242,551
Depreciation & amortization - 90,660 114,948 - 205,608
Marketing & advertising - 45,440 98,576 (457) 143,559
Supplies, freight & postage - 20,949 49,491 - 70,440
Other - 240,474 170,086 (11,684) 398,876
---------------------------------------------------------------------------------------
- 976,695 1,571,955 (12,141) 2,536,509
Operating earnings - 110,776 354,065 225 465,066
Other income, net 480,209 (29) 8,041 (480,209) 8,012
---------------------------------------------------------------------------------------
Earnings before income taxes 480,209 110,747 362,106 (479,984) 473,078
Taxes on earnings 199,047 61,814 134,430 (198,961) 196,330
---------------------------------------------------------------------------------------
Net earnings from continuing operations
before change in accounting principle 281,162 48,933 227,676 (281,023) 276,748
Change in accounting principle - 4,414 - - 4,414
---------------------------------------------------------------------------------------
Net earnings $ 281,162 $ 53,347 $ 227,676 $ (281,023) $ 281,162
------------------------------------------=======================================================================================
</TABLE>
ONE TO ONE | H&R BLOCK | 2001 57
<PAGE> 38
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
Year Ended April 30, 2000
<TABLE>
<CAPTION>
H&R Block, Inc. BFC Other Consolidated
(Guarantor) (Subsidiary Issuer) Subsidiaries Eliminations H&R Block
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ - $ 761,908 $ 1,701,325 $ (11,290) $ 2,451,943
======================================================================================
Expenses:
Compensation & benefits - 199,124 764,412 - 963,536
Occupancy & equipment - 29,264 223,907 - 253,171
Interest - 156,123 (1,096) - 155,027
Depreciation & amortization - 47,510 99,708 - 147,218
Marketing & advertising - 49,099 91,584 - 140,683
Supplies, freight & postage - 11,490 53,109 - 64,599
Other - 158,200 178,711 (11,290) 325,621
--------------------------------------------------------------------------------------
- 650,810 1,410,335 (11,290) 2,049,855
Operating earnings - 111,098 290,990 - 402,088
Other income, net 412,266 113 10,065 (412,266) 10,178
--------------------------------------------------------------------------------------
Earnings before income taxes 412,266 111,211 301,055 (412,266) 412,266
Taxes on earnings 160,371 52,494 107,877 (160,371) 160,371
--------------------------------------------------------------------------------------
Net earnings $ 251,895 $ 58,717 $ 193,178 $ (251,895) $ 251,895
-----------------------------------------======================================================================================
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
Year Ended April 30, 1999
<TABLE>
<CAPTION>
H&R Block, Inc. BFC Other Consolidated
(Guarantor) (Subsidiary Issuer) Subsidiaries Eliminations H&R Block
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ - $ 386,938 $ 1,270,441 $ (12,714) $ 1,644,665
======================================================================================
Expenses:
Compensation & benefits - 71,670 539,196 - 610,866
Occupancy & equipment - 10,740 171,961 - 182,701
Interest - 72,034 (2,696) - 69,338
Depreciation & amortization - 16,604 58,001 - 74,605
Marketing & advertising - 18,512 71,544 - 90,056
Supplies, freight & postage - 4,821 52,336 - 57,157
Other - 123,138 94,444 (12,714) 204,868
-------------------------------------------------------------------------------------
- 317,519 984,786 (12,714) 1,289,591
Operating earnings - 69,419 285,655 - 355,074
Other income, net 346,772 (3,777) 32,244 (346,772) 28,467
--------------------------------------------------------------------------------------
Earnings before income taxes 346,772 65,642 317,899 (346,772) 383,541
Taxes on earnings 131,406 23,933 121,813 (131,406) 145,746
--------------------------------------------------------------------------------------
Net earnings from continuing operations 215,366 41,709 196,086 (215,366) 237,795
Discontinued operations - (22,429) - - (22,429)
--------------------------------------------------------------------------------------
Net earnings $ 215,366 $ 19,280 $ 196,086 $ (215,366) $ 215,366
-----------------------------------------======================================================================================
</TABLE>
58 ONE TO ONE | H&R BLOCK | 2001
<PAGE> 39
CONDENSED CONSOLIDATING BALANCE SHEET
April 30, 2001
<TABLE>
<CAPTION>
H&R Block, Inc. BFC Other Consolidated
(Guarantor) (Subsidiary Issuer) Subsidiaries Eliminations H&R Block
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash & cash equivalents $ - $ 167,139 $ 104,674 $ - $ 271,813
Receivables from customers, brokers,
dealers and clearing organizations - 1,310,804 - - 1,310,804
Receivables - 172,409 200,814 - 373,223
Excess of cost over fair value of net
tangible assets acquired - 573,691 478,135 - 1,051,826
Investment in subsidiaries 2,452,643 215 262 (2,452,643) 477
Other assets - 720,004 394,431 (954) 1,113,481
--------------------------------------------------------------------------------------
Total assets $ 2,452,643 $ 2,944,262 $ 1,178,316 $(2,453,597) $ 4,121,624
======================================================================================
Notes payable $ - $ - $ - $ - $ -
Accounts payable to customers, brokers
and dealers - 1,058,000 - - 1,058,000
Long-term debt - 746,250 124,724 - 870,974
Other liabilities 4,763 228,847 782,058 3,241 1,018,909
Net intercompany advances 1,274,139 637,487 (1,907,206) (4,420) -
Stockholders' equity 1,173,741 273,678 2,178,740 (2,452,418) 1,173,741
--------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $ 2,452,643 $ 2,944,262 $ 1,178,316 $(2,453,597) $ 4,121,624
-----------------------------------------======================================================================================
</Table>
CONDENSED CONSOLIDATING BALANCE SHEET
April 30, 2000
<TABLE>
<CAPTION>
H&R Block, Inc. BFC Other Consolidated
(Guarantor) (Subsidiary Issuer) Subsidiaries Eliminations H&R Block
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash & cash equivalents $ - $ 256,823 $ 123,078 $ - $ 379,901
Receivables from customers, brokers,
dealers and clearing organizations - 2,857,379 - - 2,857,379
Receivables - 257,987 176,735 - 434,722
Excess of cost over fair value of net
tangible assets acquired - 620,780 474,294 - 1,095,074
Investment in subsidiaries 2,188,835 615 903 (2,188,835) 1,518
Other assets - 565,741 377,867 667 944,275
--------------------------------------------------------------------------------------
Total assets $ 2,188,835 $ 4,559,325 $ 1,152,877 $(2,188,168) $ 5,712,869
======================================================================================
Notes payable $ - $ 283,797 $ - $ - $ 283,797
Accounts payable to customers, brokers
and dealers - 2,570,200 - - 2,570,200
Long-term debt - 745,600 126,796 - 872,396
Other liabilities 4,763 174,697 604,483 (16,056) 767,887
Net intercompany advances 965,483 559,843 (1,542,049) 16,723 -
Stockholders' equity 1,218,589 225,188 1,963,647 (2,188,835) 1,218,589
--------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $ 2,188,835 $ 4,559,325 $ 1,152,877 $(2,188,168) $ 5,712,869
-----------------------------------------======================================================================================
</TABLE>
ONE TO ONE | H&R BLOCK | 2001 59
<PAGE> 40
CONDENSED CONSOLIDATING BALANCE SHEET
April 30, 1999
<TABLE>
<CAPTION>
H&R Block, Inc. BFC Other Consolidated
(Guarantor) (Subsidiary Issuer) Subsidiaries Eliminations H&R Block
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash & cash equivalents $ - $ 16,026 $ 177,214 $ - $ 193,240
Receivables - 686,602 56,699 - 743,301
Excess of cost over fair value of net
tangible assets acquired - 189,784 215,750 - 405,534
Investment in subsidiaries 1,902,665 1,490 226 (1,902,665) 1,716
Other assets - 229,016 337,369 - 566,385
-----------------------------------------------------------------------------
Total assets $ 1,902,665 $ 1,122,918 $ 787,258 $(1,902,665) $ 1,910,176
=============================================================================
Notes payable $ - $ 71,939 $ - $ - $ 71,939
Long-term debt - 249,725 - - 249,725
Other liabilities 4,764 84,029 437,732 - 526,525
Net intercompany advances 835,914 552,301 (1,388,215) - -
Stockholders' equity 1,061,987 164,924 1,737,741 (1,902,665) 1,061,987
-----------------------------------------------------------------------------
Total liabilities and stockholders'
equity $ 1,902,665 $ 1,122,918 $ 787,258 $(1,902,665) $ 1,910,176
-----------------------------------------------------=============================================================================
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended April 30, 2001
<TABLE>
<CAPTION>
H&R Block, Inc. BFC Other Consolidated
(Guarantor) (Subsidiary Issuer) Subsidiaries Eliminations H&R Block
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating activities $ 2,235 $ (186,171) $ 479,451 $ - $ 295,515
-----------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of available-for-sale securities - - (10,636) - (10,636)
Maturities of available-for-sale securities - 16,024 5,500 - 21,524
Sales of available-for-sale securities - 319,620 36,572 - 356,192
Purchases of property and equipment, net - (33,004) (57,029) - (90,033)
Payments made for business acquisitions - - (21,143) - (21,143)
Proceeds from sale of subsidiary - - 23,200 - 23,200
Net intercompany advances 308,656 77,644 (386,300) - -
Other, net - - (20,497) - (20,497)
-----------------------------------------------------------------------------
Net cash provided by (used in) investing activities 308,656 380,284 (430,333) - 258,607
---------------------------------------------------------------- ------------
Cash flows from financing activities:
Repayments of notes payable - (18,219,741) - - (18,219,741)
Proceeds from issuance of notes payable - 17,935,944 - - 17,935,944
Payments on acquisition debt - - (68,743) - (68,743)
Dividends paid (108,374) - - - (108,374)
Payments to acquire treasury shares (222,895) - - - (222,895)
Proceeds from stock options exercised 19,550 - - - 19,550
Other, net 828 - 1,221 - 2,049
-----------------------------------------------------------------------------
Net cash used in financing activities (310,891) (283,797) (67,522) - (662,210)
-----------------------------------------------------------------------------
Net decrease in cash & cash equivalents - (89,684) (18,404) - (108,088)
Cash & cash equivalents at beginning of the year - 256,823 123,078 - 379,901
-----------------------------------------------------------------------------
Cash & cash equivalents at end of the year $ - $ 167,139 $ 104,674 $ - $ 271,813
-----------------------------------------------------=============================================================================
</TABLE>
60 ONE TO ONE | H&R BLOCK | 2001
<PAGE> 41
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended April 30, 2000
<TABLE>
<CAPTION>
H&R Block, Inc. BFC Other Consolidated
(Guarantor) (Subsidiary Issuer) Subsidiaries Eliminations H&R Block
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating activities $ 3,736 $ 176,517 $ 310,325 $ - $ 490,578
-----------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of available-for-sale securities - - (14,281) - (14,281)
Maturities of available-for-sale securities - 10,845 57,416 - 68,261
Sales of available-for-sale securities - 191,839 19,997 - 211,836
Purchases of property and equipment, net - (36,481) (105,375) - (141,856)
Payments made for business acquisitions - (817,587) (154,215) - (971,802)
Net intercompany advances 119,697 8,081 (127,778) - -
Other, net - (75) (6,430) - (6,505)
-----------------------------------------------------------------------------
Net cash used in investing activities 119,697 (643,378) (330,666) - (854,347)
-----------------------------------------------------------------------------
Cash flows from financing activities:
Repayments of notes payable - (50,800,661) - - (50,800,661)
Proceeds from issuance of notes payable - 51,012,519 - - 51,012,519
Proceeds from issuance of long-term debt - 495,800 - - 495,800
Payments on acquisition debt - - (4,730) - (4,730)
Dividends paid (105,480) - - - (105,480)
Payments to acquire treasury shares (50,654) - - - (50,654)
Proceeds from stock options exercised 36,958 - - - 36,958
Other, net (4,257) - (29,065) - (33,322)
-----------------------------------------------------------------------------
Net cash provided by (used in) financing activities (123,433) 707,658 (33,795) - 550,430
-----------------------------------------------------------------------------
Net increase (decrease) in cash & cash equivalents - 240,797 (54,136) - 186,661
Cash & cash equivalents at beginning of the year - 16,026 177,214 - 193,240
-----------------------------------------------------------------------------
Cash & cash equivalents at end of the year $ - $ 256,823 $ 123,078 $ - $ 379,901
-----------------------------------------------------=============================================================================
</TABLE>
ONE TO ONE | H&R BLOCK | 2001 61
<PAGE> 42
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended April 30, 1999
<TABLE>
<CAPTION>
H&R Block, Inc. BFC Other Consolidated
(Guarantor) (Subsidiary Issuer) Subsidiaries Eliminations H&R Block
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating activities $ 4,315 $ (77,843) $ 312,802 $ - $ 239,274
-----------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of available-for-sale securities - - (251,627) - (251,627)
Maturities of available-for-sale securities - 8,161 211,239 - 219,400
Sales of available-for-sale securities - 90,126 432,126 - 522,252
Purchases of property and equipment, net - (6,499) (83,283) - (89,782)
Payments made for business acquisitions - - (123,657) - (123,657)
Net intercompany advances 506,211 657,263 (1,163,474) - -
Other, net - (3,460) (22,183) - (25,643)
-----------------------------------------------------------------------------
Net cash provided by (used in) investing activities 506,211 745,591 (1,000,859) - 250,943
-----------------------------------------------------------------------------
Cash flows from financing activities:
Repayments of notes payable - (17,276,595) - - (17,276,595)
Proceeds from issuance of notes payable - 16,593,978 - - 16,593,978
Dividends paid (95,004) - - - (95,004)
Payments to acquire treasury shares (492,945) - - - (492,945)
Proceeds from stock options exercised 73,481 - - - 73,481
Other, net 3,942 - (4,690) - (748)
-----------------------------------------------------------------------------
Net cash used in financing activities (510,526) (682,617) (4,690) - (1,197,833)
-----------------------------------------------------------------------------
Net decrease in cash & cash equivalents - (14,869) (692,747) - (707,616)
Cash & cash equivalents at beginning of the year - 30,895 869,961 - 900,856
-----------------------------------------------------------------------------
Cash & cash equivalents at end of the year $ - $ 16,026 $ 177,214 $ - $ 193,240
-----------------------------------------------------=============================================================================
</TABLE>
62 ONE TO ONE | H&R BLOCK | 2001
<PAGE> 43
MANAGEMENT'S REPORT & REPORT OF INDEPENDENT ACCOUNTANTS
MANAGEMENT'S REPORT
The financial information in this Annual Report, including the consolidated
financial statements, has been prepared by the management of H&R Block, Inc.
Management believes the information presented in the Annual Report is consistent
with the financial statements, the financial statements are prepared in
accordance with generally accepted accounting principles, and the financial
statements do not contain material misstatements due to fraud or error. Where
appropriate, the financial statements reflect management's best estimates and
judgments.
Management also is responsible for maintaining a system of internal
accounting controls with the objectives of providing reasonable assurance that
the Company's assets are safeguarded against material loss from unauthorized use
or disposition, and that authorized transactions are properly recorded to permit
the preparation of accurate financial data. However, limitations exist in any
system of internal controls based on a recognition that the cost of the system
should not exceed its benefits. The Company believes its system of accounting
controls, of which its internal auditing function is an integral part,
accomplishes the stated objectives.
PricewaterhouseCoopers LLP, independent accountants, audited H&R Block's
2001 and 2000 consolidated financial statements and issued opinions thereon.
Their audits were made in accordance with generally accepted auditing standards
and included an objective, independent review of the system of internal controls
to the extent necessary to express an opinion on the financial statements.
The Audit Committee of the Board of Directors, composed of outside
directors, meets periodically with management, the independent accountants and
the internal auditor to review matters relating to the Company's annual
financial statements, internal audit activities, internal accounting controls
and non-audit services provided by the independent accountants. The independent
accountants and the internal auditor have full access to the Audit Committee and
meet with it, both with and without management present, to discuss the scope and
results of their audits including internal controls, audit and financial
matters.
/s/ Mark A. Ernst
Mark A. Ernst
President and Chief Executive Officer
/s/ Frank J. Cotroneo
Frank J. Cotroneo
Senior Vice President and Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
H&R Block, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of earnings, of cash flows and of stockholders'
equity present fairly, in all material respects, the financial position of H&R
Block, Inc. and its subsidiaries (the "Company") at April 30, 2001 and 2000,
and the results of their operations and their cash flows for each of the three
years in the period ended April 30, 2001 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Kansas City, Missouri
June 19, 2001
ONE TO ONE | H&R BLOCK | 2001 63
<PAGE> 44
<Table>
<CAPTION>
COMMON STOCK DATA
Stock Price Cash Dividend
------------------------- ---------------
High Low Paid per Share
--------- --------- ---------------
<S> <C> <C> <C>
2000 FISCAL YEAR:
Quarter ended 7/31/99 $ 58.88 $ 45.50 $ .25
Quarter ended 10/31/99 59.50 38.00 .275
Quarter ended 1/31/00 49.50 39.88 .275
Quarter ended 4/30/00 49.50 39.50 .275
2001 FISCAL YEAR:
Quarter ended 7/31/00 $ 42.56 $ 26.94 $ .275
Quarter ended 10/31/00 37.38 31.31 .30
Quarter ended 1/31/01 44.06 32.81 .30
Quarter ended 4/30/01 55.00 41.80 .30
</Table>
Traded on the New York Stock Exchange; Ticker Symbol: HRB
64 ONE TO ONE | H&R BLOCK | 2001
<PAGE> 45
SELECTED FINANCIAL DATA
Amounts in thousands, except per share amounts and number of shareholders
<TABLE>
<CAPTION>
April 30 2001 2000 1999 1998 1997
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR:
Total revenues $3,001,575 $2,451,943 $1,644,665 $1,269,981 $1,066,410
Net earnings from continuing operations $ 276,748 $ 251,895 $ 237,795 $ 183,788 $ 148,132
Net earnings $ 281,162 $ 251,895 $ 215,366 $ 392,130 $ 47,755
AT YEAR END:
Total assets $4,121,624 $5,712,869 $1,910,176 $2,904,083 $1,707,058
Cash, cash equivalents and marketable securities $ 596,396 $ 681,567 $ 420,649 $1,590,192 $ 539,107
Long-term debt $ 870,974 $ 872,396 $ 249,725 $ 249,675 $ -
Stockholders' equity $1,173,741 $1,218,589 $1,061,987 $1,341,632 $ 999,097
Shares outstanding 91,804 98,035 97,629 106,981 104,067
Number of shareholders 31,523 33,557 34,624 31,177 33,517
MEASUREMENTS:
Per basic share of common stock:
Net earnings from continuing operations $ 3.01 $ 2.57 $ 2.38 $ 1.75 $ 1.42
Net earnings $ 3.06 $ 2.57 $ 2.16 $ 3.74 $ .46
Per diluted share of common stock:
Net earnings from continuing operations $ 2.99 $ 2.55 $ 2.36 $ 1.71 $ 1.40
Net earnings $ 3.04 $ 2.55 $ 2.14 $ 3.65 $ .45
Other per share data:
Cash dividends declared $ 1.17 1/2 $ 1.07 1/2 $ .95 $ .80 $ 1.04
Net book value $ 12.79 $ 12.43 $ 10.88 $ 12.54 $ 9.60
Return on total revenues 9.2% 10.3% 14.5% 14.5% 13.9%
Return on stockholders' equity 29.7% 25.1% 22.0% 38.1% 5.2%
</TABLE>
ONE TO ONE | H&R BLOCK | 2001 65
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>5
<FILENAME>c63912ex21.txt
<DESCRIPTION>SUBSIDIARIES OF THE COMPANY
<TEXT>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF H&R BLOCK, INC.
The following is a list of the direct and indirect subsidiaries of H&R
Block, Inc., a Missouri corporation. All active subsidiaries do business under
their corporate names listed below or close derivatives thereof:
JURISDICTION IN
NAME WHICH ORGANIZED
---- ---------------
1) Block Investment Corporation............................Delaware (1)
2) H&R Block Group, Inc....................................Delaware (1)
3) HRB Management, Inc.....................................Missouri (2)
4) H&R Block Tax and Financial Services Limited............United Kingdom (3)
5) Companion Insurance, Ltd................................Bermuda (3)
6) H&R Block Services, Inc.................................Missouri (2)
7) H&R Block Tax Services, Inc.............................Missouri (4)
8) H&R Block of Dallas, Inc................................Texas (5)
9) HRB Partners, Inc.......................................Delaware (6)
10) HRB Texas Enterprises, Inc..............................Missouri (5)
11) H&R Block and Associates, L.P...........................Delaware (7)
12) BWA Advertising, Inc....................................Missouri (5)
13) H&R Block (Guam), Inc...................................Guam (5)
14) H&R Block Enterprises (Guam), Inc.......................Guam (8)
15) H&R Block Canada, Inc...................................Canada (5)
16) H&R Block (Nova Scotia), Incorporated...................Nova Scotia (9)
17) Cashplan Systems, Inc...................................British Columbia(9)
18) H&R Block Enterprises, Inc..............................Missouri (5)
19) H&R Block Tax Company, LLC..............................Missouri (10)
20) H&R Block Support Services, LLC.........................Missouri (10)
21) H&R Block Eastern Tax Services, Inc.....................Missouri (4)
22) H&R Block Eastern Enterprises, Inc......................Missouri (11)
23) H&R Block Eastern Tax Company, LLC......................Missouri (12)
24) H&R Block Eastern Support Services, LLC.................Missouri (12)
25) HRB Royalty, Inc........................................Delaware (4)
26) H&R Block Limited.......................................New South Wales (13)
27) H&R Block Acquisition, Inc..............................Missouri (4)
28) Block Financial Corporation.............................Delaware (2)
29) Option One Mortgage Corporation.........................California (14)
30) Option One Mortgage Acceptance Corporation..............Delaware (15)
31) Option One Mortgage Securities Corp.....................Delaware (15)
32) Premier Trust Deed Services, Inc........................California (15)
33) Premier Mortgage Services of Washington, Inc............Washington (15)
34) H&R Block Mortgage Corporation..........................Ontario (15)
35) H&R Block Mortgage Corporation..........................Massachusetts (15)
36) Option One Direct Insurance Agency, Inc.................California (15)
37) Block Mortgage Finance, Inc.............................Delaware (15)
38) Option One Loan Warehouse Corporation...................Delaware (15)
39) Companion Mortgage Corporation..........................Delaware (14)
1
<PAGE> 2
40) Franchise Partner, Inc..................................Nevada (14)
41) H&R Block Investments, Inc..............................Delaware (14)
42) H&R Block Insurance Services, Inc.......................Delaware (14)
43) NCS Mortgage Services, L.L.C............................Georgia (16)
44) National Consumer Services Corp. II, L.L.C..............Georgia (16)
45) OLDE Financial Corporation..............................Michigan (14)
46) H&R Block Financial Advisors, Inc.......................Michigan (17)
47) OLDE Discount of Canada.................................Canada (18)
48) C.U. Brokerage Services, Inc............................Michigan (17)
49) OLDE Asset Management, Inc..............................Michigan (17)
50) OLDE Clearing Corporation...............................Delaware (17)
51) Smart Travel, Inc.......................................Michigan (17)
52) Realty Acquisitions, Inc................................Michigan (17)
53) OLDE Property Corporation...............................Michigan (17)
54) OLDE Realty Corporation.................................Michigan (17)
55) 420 South Garden, Inc...................................Florida (19)
56) 44 East Central.........................................Florida (19)
57) 4240 Hunt Road, Inc.....................................Ohio (19)
58) 3340 Gallows Road, Inc..................................Michigan (19)
59) 450 Silver Spur, Inc....................................Michigan (19)
60) 4230 West Green Oaks, Inc...............................Michigan (19)
61) 3414 Shawnee Mission, Inc...............................Michigan (19)
62) OLDE Equipment Corporation..............................Michigan (17)
63) H&R Block Financial Corporation.........................Michigan (17)
64) American Brokerage Services, Inc........................Vermont (17)
65) Financial Marketing Services, Inc.......................Michigan (14)
66) 2430472 Nova Scotia Co..................................Nova Scotia (20)
67) Sumner Canadian Direct Holdings Company.................Canada (20)
68) North American Printing Co..............................Canada (21)
69) HRB Business Services, Inc..............................Delaware (2)
70) RSM McGladrey, Inc......................................Delaware (22)
71) Toback, Inc.............................................Arizona (23)
72) McGladrey Contract Business Services, L.L.C.............Minnesota (24)
73) Birchtree Financial Services, Inc.......................Oklahoma (23)
74) Birchtree Insurance Agency, Inc.........................Missouri (25)
75) FERS Business Services, Inc.............................Delaware (23)
76) Pension Resources, Inc..................................Illinois (26)
77) Freed Maxick ABL Services, Inc..........................Delaware (23)
78) DMJK Business Services, Inc.............................Missouri (22)
79) Practice Development Institute, Inc. ...................Delaware (22)
80) FERS Personal Financial Services, Inc...................Delaware (22)
81) FM Business Services, Inc...............................Delaware (22)
82) WS Business Services, Inc...............................Delaware (22)
83) Rex Investments, Inc....................................Texas (27)
84) WSB-NEV, L.L.C..........................................Nevada (28)
85) W-1 Holdings, L.L.C.....................................Texas (28)
86) Wallace Sanders Business Consulting, L.P................Texas (29)
87) C.W. Amos Business Services, Inc. ......................Delaware (22)
88) C.W. Amos Investment Advisors, L.L.C....................Maryland (30)
89) RP Business Services, Inc...............................Delaware (22)
2
<PAGE> 3
90) HRB Retail Services, Inc................................Delaware (2)
Notes to Subsidiaries of H&R Block, Inc.:
(1) Wholly owned subsidiary of H&R Block, Inc.
(2) Wholly owned subsidiary of H&R Block Group, Inc.
(3) Wholly owned subsidiary of HRB Management, Inc.
(4) Wholly owned subsidiary of H&R Block Services, Inc.
(5) Wholly owned subsidiary of H&R Block Tax Services, Inc.
(6) Wholly owned subsidiary of H&R Block of Dallas, Inc.
(7) Limited partnership in which H&R Block Texas Enterprises, Inc. is a 1%
general partner and HRB Partners, Inc. is a 99% limited partner
(8) Wholly owned subsidiary of H&R Block (Guam), Inc.
(9) Wholly owned subsidiary of H&R Block Canada, Inc.
(10) Limited liability company in which H&R Block Tax Services, Inc. has a 100%
membership interest
(11) Wholly owned subsidiary of H&R Block Eastern Tax Services, Inc.
(12) Limited liability company in which H&R Block Eastern Tax Services, Inc.
has a 100% membership interest
(13) Wholly owned subsidiary of HRB Royalty, Inc.
(14) Wholly owned subsidiary of Block Financial Corporation
(15) Wholly owned subsidiary of Option One Mortgage Corporation
(16) Limited liability company in which Block Financial Corporation has a
96.25% membership interest and Companion Mortgage Corporation has a 3.75%
membership interest
(17) Wholly owned subsidiary of OLDE Financial Corporation
(18) Wholly owned subsidiary of H&R Block Financial Advisors, Inc.
(19) Wholly owned subsidiary of OLDE Realty Corporation
(20) Wholly owned subsidiary of Financial Marketing Services, Inc.
(21) Company in which Sumner Canadian Direct Holdings Company owns 140,000
shares and Financial Marketing Services, Inc. owns 4,200 shares
(22) Wholly owned subsidiary of HRB Business Services, Inc.
(23) Wholly owned subsidiary of RSM McGladrey, Inc.
(24) Limited liability company in which RSM McGladrey, Inc. has a 100%
membership interest
(25) Wholly owned subsidiary of Birchtree Financial Services, Inc.
(26) Wholly owned subsidiary of FERS Business Services, Inc.
(27) Wholly owned subsidiary of WS Business Services, Inc.
(28) Limited liability company in which WS Business Services, Inc. has a 100%
membership interest
(29) Limited partnership in which W-1 Holdings, L.L.C. has a 1% general
partnership interest and WSB-NEV, L.L.C. has a 99% limited partnership
interest
(30) Limited liability company in which C.W. Amos Business Services, Inc. has a
100% membership interest
3
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>6
<FILENAME>c63912ex23.txt
<DESCRIPTION>CONSENT OF PRICEWATERHOUSECOOPERS LLP
<TEXT>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (No. 333-33655) of Block Financial Corporation and in the
Registration Statements on Form S-3 (No. 333-33655-01) and Form S-8 (Nos.
33-185, 33-33889, 33-54989, 33-64147, 333-42143, 333-42736, 333-42738,
333-42740, 333-5640) of H&R Block, Inc. of our report dated June 19, 2001
relating to the financial statements of H&R Block, Inc., which appears in the
2001 Annual Report to Shareholders, which is incorporated by reference in this
Annual Report on Form 10-K for the year ended April 30, 2001. We also consent to
the incorporation by reference of our report dated June 19, 2001 relating to the
financial statement schedule, which appears in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Kansas City, Missouri
July 30, 2001
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>